OTM is an acronym that stands for "Out of the Money." It is primarily used in the field of finance, particularly in options trading. In options trading, an option contract is said to be OTM when the current market price of the underlying asset is not favorable to the holder of the option.
An option contract grants the holder the right, but not the obligation, to buy or sell an underlying asset at a predetermined price, known as the strike price, on or before a specific date. In the context of call options, if the current market price of the underlying asset is lower than the strike price, the call option is considered OTM, as there is no immediate benefit to exercising the option. Similarly, in the context of put options, if the market price of the underlying asset is higher than the strike price, the put option is considered OTM.
When an option is OTM, it is not worthless, but rather has no intrinsic value at the time. However, the option may still have time value depending on the amount of time left until expiration and other factors. Traders and investors study the OTM status of options to assess their profit potential and determine their risk/reward ratios.
Overall, "OTM" refers to the condition of an option contract when the current market price of the underlying asset is unfavorable to the holder, indicating that exercising the option at that point would not yield a profit.
