Short answer: An out-of-the-money (OTM) call option is a contract that gives its buyer the right to buy an asset at a fixed price, called the strike price, when the asset’s current market price is below that strike. The buyer pays an amount called the premium for this right, and profits only if the price rises above the strike by more than the premium by expiry.
Last reviewed: 10 November 2026
At a glance
| Term | What it means | How it applies to an OTM call |
|---|---|---|
| Underlying asset | The asset the option is based on | Its market price is below the strike price |
| Strike price | The fixed price at which the buyer can buy | Sits above the market price |
| Premium | The amount the buyer pays for the option | Made up entirely of time value |
| Intrinsic value | The value of exercising the option right now | Zero |
| Time decay | The loss of value as expiry approaches | Lowers the premium over time |
| Exercising right away | Buying at the strike price immediately | Unprofitable |
What makes a call option out of the money?
A call option gives its buyer the right, but not the obligation, to buy the underlying asset at the strike price before the option expires. A call is out of the money when the market price of that asset sits below the strike price. The strike is above the market, so buying at the strike would mean paying more than the asset is worth today.
Consider a hypothetical share trading at ₹500 with a call option carrying a strike price of ₹550. The strike sits ₹50 above the market price, so this call is out of the money. This example uses invented figures for illustration only.
Why would exercising an OTM call right away lose money?
Exercising means using the right to buy at the strike price. In the hypothetical example, a buyer who exercised at ₹550 would pay ₹50 more per share than the share’s market value of ₹500. That is why exercising an OTM call immediately would be unprofitable.
The buyer would only consider the option useful if the share price moved up before expiry. Until then, the option gives no immediate gain.
Why does an OTM call have no intrinsic value?
Intrinsic value is the amount an option would be worth if exercised now. For a call, it is the market price minus the strike price, if that figure is positive. Since the market price is below the strike, an OTM call has no intrinsic value.
This means the entire premium is time value. Time value is the amount paid for the chance that the underlying price moves in the buyer’s favour before expiry. The premium therefore pays for possibility, not for any value that exists today.
Why are OTM calls cheaper than other calls?
Because they lack intrinsic value, OTM calls usually cost less than in-the-money (ITM) options, where the market price is above the strike, and at-the-money (ATM) options, where the two are roughly equal. The lower premium can look attractive, but it does not make the option safer. The premium can still be lost in full if the price does not move far enough.
Lower cost also means less of the buyer’s money is at stake per contract. The catch is that the chance of a full loss is higher, as explained in the sections below.
When does an OTM call actually make money?
An OTM call becomes profitable only if the underlying price rises above the strike price by enough to cover the premium. Using the same hypothetical share, suppose the strike is ₹550 and the premium is ₹10 per share. For a hypothetical 100 shares, the total premium is ₹1,000.
The breakeven price at expiry is ₹560, which is the strike plus the premium. If the share is at ₹575 at expiry, the option is worth ₹2,500 (₹25 × 100 shares), and the net profit is ₹1,500 after the ₹1,000 premium. If the share is at ₹540 at expiry, the option expires worthless and the buyer loses the full ₹1,000.
How does time decay affect an OTM call?
Time decay, also called premium decay, is the reduction in an option’s value as its expiry date approaches. Because an OTM call’s premium is entirely time value, that value shrinks as the time left to make the required move runs out. The buyer can lose value even if the share price does not fall.
This is a key catch. The buyer needs the underlying to move above the breakeven price before time runs out, and each passing period reduces the time available for that move.
Why do small price moves create large percentage changes?
Because the premium is small relative to the stock price, a modest move in the underlying can produce a large percentage change in the option’s value. In the hypothetical example, the premium of ₹1,000 is small against the share value of ₹50,000 (100 shares at ₹500). The share rises 15%, from ₹500 to ₹575, and the net profit of ₹1,500 is 150% of the premium paid.
The same magnification works in reverse. If the share falls or stays below the strike, the buyer can lose 100% of the premium. Gains and losses are both amplified relative to the amount paid.
How likely is an OTM call to expire worthless?
OTM options have a higher probability of expiring worthless than ITM or ATM options. This is because the underlying must move substantially in the expected direction, and above the strike by more than the premium, for the option to have any value at expiry. If it does not, the option expires with no value and the premium is lost.
Understanding this trade-off is central to reading OTM options. The lower premium is paid in exchange for a lower chance of the option finishing in profit.
Frequently asked questions
Does an OTM call have any intrinsic value?
No. Its market price is below the strike price, so its intrinsic value is zero. Its whole premium is time value, tied to the chance of a future price move.
Why is an OTM call cheaper than an at-the-money option?
An OTM call has no intrinsic value, so its premium is made up only of time value. An at-the-money option has a premium that can include intrinsic value, which generally makes it costlier.
Does an OTM call lose value as expiry approaches?
Yes. This effect is called time decay or premium decay, and the option’s value falls as expiry nears.
Is an OTM call more likely to expire worthless?
Yes. OTM options have a higher probability of expiring worthless than ITM or ATM options, because the underlying must move substantially in the expected direction.
Sources and last check
Facts in this article were checked against the sources below on 10 November 2026. Rules and figures can change; check the primary source before acting.
- kotakneo.com (broker education)
- upstox.com (broker education)
- dhan.co (broker education)
- icicidirect.com (broker education)
This article is general information, not investment advice. MyFinanceBandhu is not a SEBI-registered investment adviser.