OTM
Also: Out of The Money
The strike is not favourable yet. Everything the contract is worth is extrinsic, and that evaporates with time.
In the chapter
What you buy and what you commit to
From the same chapter
- CallA contract giving you the RIGHT to buy the underlying at a fixed price before a date. Buying one bets it rises; selling one bets it does not rise that much.
- PutA contract giving you the RIGHT to sell the underlying at a fixed price before a date. It is the most direct way to hedge a fall.
- StrikeThe fixed price at which the contract lets you buy or sell. Choosing it changes the outcome more than getting the direction right.
- ExpirationThe date the contract stops existing. From then on it is worth only its intrinsic value, which is almost always zero.
- Option premiumWhat the contract costs. It is intrinsic value plus extrinsic value, and it is the most a buyer can lose.
- Contract multiplierHow many units of the underlying one contract controls. In stocks it is usually 100, so a premium of 2 costs 200.
- ITMThe strike is already favourable: a call with price above it, a put below. It has intrinsic value.
- ATMThe strike sits right at the current price. It is where the contract holds the most extrinsic value and the most gamma.