Out of the money (OTM)
Out of the money means an option has no built-in value yet. A call is out of the money below its strike. A put is out of the money above its strike.
In depth
Stock at 100, call strike 105. Exercising would give you nothing. The whole price of that call is time value. You are paying for the chance the stock gets there. Buy it at 0.80 and watch the stock close at 103. It expires worthless, even though you were right about direction.
Cheap is the trap. The low price reflects the odds, and the odds are what you are buying. These contracts need the move to happen, and to happen before expiry. They also move less per dollar of stock movement than a strike that is already in the money.
Why it matters
Traders reach for far strikes when the account is small. It feels like more contracts for the money. What they buy is a smaller chance of anything. A move that would have paid on a closer strike leaves them flat. The loss looks like bad analysis, when it was strike choice.
TraderLog keeps no strike or expiry field. Put the moneyness in the day's journal entry, or on a tag of your own. The automatic tag for contracts that expired worthless does the accounting. The By tag table shows what that group has cost.
Frequently asked questions
The option has no built-in value. A call is out of the money below its strike, a put above its strike.
Because they are all time value. They pay nothing unless the stock reaches the strike before expiry.
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