Out of The Money (OTM)

1. Definition

OTM refers to an option that has no intrinsic value. It is purely a speculative bet that the price will move significantly before expiration.

2. Key Characteristics

1. Zero Intrinsic Value: The price consists 100% of Time Value. If the option expires OTM, you lose your entire investment.
2. Cheapest Premium: Because the probability of profit is low, these are the cheapest options to buy.
3. Massive Leverage: A small move in the stock price can result in a huge percentage gain in the option price (if it moves in your favor).

3. Investment Logic (Delta)

• Delta: Low (Close to 0).
• Risk: Highly sensitive to Time Decay (Theta). As expiration nears, OTM options lose value very quickly.
• Usage:
  • Buyers: Speculators looking for "Lottery Tickets" or cheap hedging (Insurance).
  • Sellers: Income seekers who sell OTM options hoping they expire worthless to collect the premium.