Account
New to ADSS? Open an
account now to get started.
Already have an account?
Add funds to your ADSS account
Account
New to ADSS? Open an
account now to get started.
Add funds to your ADSS account
Out of the money (OTM) is a term used in options trading to describe an options contract that has no intrinsic value if it is exercised today. This means it only has extrinsic value. This means if the owner exercised it, they would pay more than the current market value (in the case of a call option) or sell it for less than its current market value (in the case of a put option).
In other words, a call option is out of the money if its strike price is higher than its market or spot price. Conversely, a put option is out of the money if its strike price is lower than its spot price.
If an options contract reaches its expiration date while out of the money, it expires worthless because there is no point in exercising it. This means the owner will also lose the premium they paid for it.
However, it would be wrong to say that out of the money options are worthless. In reality, the value of an option is made up of three things: its intrinsic value, its time value (how long it remains until expiration) and the volatility of its underlying asset. The longer until the contract’s expiration and the more volatile the underlying asset, the more value an OTM option has.
Say, a call option on a highly volatile stock is OTM by $4 and expires in a month. As the underlying stock is volatile, there is a chance it could increase more than $4 within the remaining month. This would cause the option to move into the money (ITM) before its expiration. When this happens, the owner can exercise the option to buy shares of the underlying for less than the market value or resell the option for a higher premium.
Even if an OTM option does not move into the money, it can still be resold for a higher premium than what was previously paid for. This is possible if it moves closer to the money. The closer an OTM option is to being in the money, the higher its premium, which the owner can take advantage of.
The opposite of Out of the money is In the money (ITM). The latter is where options contracts have intrinsic value. For a call option, this means its strike price is lower than the current market price of the underlying asset. For a put option, this means its strike price is higher than the current market price of its underlying asset.
ADSS offers a range of global markets for traders, with CFD opportunities in indices, commodities, forex, equities and more. We also feature tutorials, how-to guides, and weekly webinars to help you navigate the financial markets and find better trading opportunities. You can start trading and investing online by opening a live trading or demo trading account.
ADSS
8th floor, CI Tower
Corniche Road
PO Box 93894
Abu Dhabi
United Arab Emirates
Trading Services
ts@adss.com
+971 2 657 2414
Investing in CFDs involves a high degree of risk that you will lose your money due to the use of leverage, particularly in fast moving markets, where a relatively small movement in the price can lead to a proportionately larger movement in the value of your investment. This can result in loses that exceed the funds in your account. You should consider whether you understand how CFDs work and you should seek independent advice if necessary.
ADS Securities L.L.C – S.P.C (“ADSS”), a limited liability company – sole proprietorship company incorporated under United Arab Emirates law. Registered under Commercial License No.1190047. ADS Securities L.L.C S.P.C is regulated and authorised in the UAE by the Capital Market Authority (CMA) under Category 1 License No.305027 (Trading Broker, Trading and Clearing Broker, Trading Broker in the International Markets, Trading Broker of OTC Derivatives and Currencies in the Spot Market, Financial Products Dealer) and Category 5 License No.20200000217 (Introduction). Registered Office: 8th Floor, CI Tower, Corniche Road, P.O. Box 93894, Abu Dhabi, United Arab Emirates.
The information presented is not directed at residents of any particular country outside the United Arab Emirates and is not intended for distribution to, or use by, any person in any country where the distribution or use is contrary to local law or regulation.
ADSS is an execution only service provider and does not provide advice. ADSS may publish general market commentary from time to time. Where it does, the material published does not constitute advice, or a solicitation, or a recommendation to a transaction in any financial instrument. ADSS accepts no responsibility for any use of the content presented and any consequences of that use. No representation or warranty is given as to the completeness of this information. Anyone acting on the information provided does so at their own risk.
