Out of the Money (OTM)

Q: When is a call out of the money and when is a put?

A call is out of the money when the underlying is below the strike; a put when it is above. With Nifty at 24,000, calls struck above 24,000 and puts struck below 24,000 are out of the money. Their intrinsic value is zero, so the whole premium is time value.

Q: Why are out-of-the-money options cheap?

Because they pay nothing unless the underlying moves past the strike before expiry, and the further the strike, the less likely that is. The premium is the market's price for that probability times the likely payoff. Cheap is not the same as good value: a ₹5 option that needs a 3% move in two days is usually overpriced relative to its chance of paying.

Q: Does delta tell me the probability an OTM option finishes in the money?

Approximately. A 0.15-delta call has roughly a 15% chance of finishing in the money under the model's assumptions. It is not the chance of profit, which is lower, because the option must finish in the money by more than the premium paid. Traders use delta as a quick probability gauge when choosing strikes to write.

Q: What happens to an OTM option at expiry?

It expires worthless and disappears from the account. Nothing is settled, no tax is charged on exercise, and the buyer's loss is the premium paid. On NSE this is the fate of most weekly out-of-the-money options, which is the writer's business model.

An option that pays nothing unless the market comes to it. Cheap to buy, tempting to sell, and the contract most weekly traders on NSE actually hold.

In short: an option is out of the money when exercising it would pay nothing: a call with its strike above the underlying's price, or a put with its strike below it. Its intrinsic value is zero, so every rupee of premium is time value, and all of it is lost if the underlying has not crossed the strike by expiry. OTM options have deltas below 0.5 in magnitude, small premiums per unit, and large percentage swings.

The intuition

A 24,500 call with Nifty at 24,000 is a claim on the index above a level it has not reached. Today it is worth nothing in settlement terms; what it sells for is the chance that Nifty gets there before expiry, multiplied by how much it might be worth if it does. The further away the strike, or the less time left, the smaller that chance, and the cheaper the option. Buyers of OTM options are buying probability; writers are selling it.

That is why "cheap" is the wrong word. A ₹5 option is priced at ₹5 because the market thinks it will almost certainly be worth ₹0. The useful question is not the price but whether the chance of the move is better than the chain is pricing, and that is a question about implied volatility, not rupees.

Formula

Call is OTM if spot < strike; put is OTM if spot > strike

Intrinsic value = 0; premium = time value entirely

Break-even for a bought OTM call = strike + premium; the underlying must travel the distance to the strike and the premium

Delta, between 0 and 0.5 for calls and 0 and −0.5 for puts, is a usable approximation of the chance of finishing in the money.

Worked example (illustrative numbers)

Suppose NIFTY is at 24,000 with seven days to the Tuesday expiry and implied volatility at 14%. The out-of-the-money calls:

Strike	Distance	Premium	Delta (≈ chance ITM)	Needs by Tuesday	Cost per lot (65)
24,200	+0.8%	₹114	0.36	24,314 (+1.3%)	₹7,410
24,500	+2.1%	₹39	0.16	24,539 (+2.2%)	₹2,535
24,800	+3.3%	₹10	0.05	24,810 (+3.4%)	₹650
25,200	+5.0%	₹1	0.01	25,201 (+5.0%)	₹65

The 25,200 call costs ₹65 a lot and the model gives it about a 1% chance of paying anything. If Nifty does rally 2% to 24,480 by Tuesday, the 24,200 call pays 280, a 155% gain; the 24,500 call expires worthless, a 100% loss, despite the rally having gone the right way. The 24,800 and 25,200 calls lose everything in every scenario short of a 3.4% and 5% move. Multiply the small per-lot premiums by the number of lots a trader buys "because they are cheap", and the loss on an ordinary week becomes substantial.

Premium falls off a cliff as strikes move out of the money. The cheapest bars are the ones most likely to be worth nothing.

Why it matters to an options trader

It is where most retail buying and most professional writing happens. The weekly Nifty chain's volume sits in the near OTM strikes on both sides; buyers want leverage, writers want probability.
Delta is the probability dial. Writers choosing strikes often target a delta (0.10 to 0.20 is common) as a rough chance of being breached; buyers who understand delta stop buying 0.02-delta lottery tickets.
OTM strikes carry the skew. OTM puts trade at higher implied volatility than OTM calls, so the same distance from the money costs more on the put side.
Spreads use OTM legs to cap risk. Buying a further OTM option against a written one turns a naked position into a defined-risk spread and slashes the margin.
OTM options are the purest vega. With no intrinsic value, their price is entirely a volatility price; they double on an IV spike and halve on a crush.

Common mistakes

Buying far OTM because it is cheap. It is cheap because it will almost certainly expire worthless; the price already says so.
Reading delta as the chance of profit. It approximates the chance of finishing in the money at all; profit needs the move to exceed the premium too.
Writing far OTM for "free" premium. Small credits for rare but catastrophic losses; the one bad week returns years of small gains.
Ignoring the bid-ask spread. On a ₹1 option the minimum ₹0.05 tick is already 5%, and real spreads are wider.
Holding an OTM option into the last session hoping for a late move. Its time value, which is all it has, is collapsing fastest exactly then.

Indian-market specifics

Nifty's weekly Tuesday expiry means a new set of OTM weeklies is born every Wednesday and most of them expire worthless the following Tuesday; the writer's income on NSE comes largely from this cycle.
At expiry an OTM option simply lapses: no settlement, no delivery, no STT on exercise. The buyer's STT was paid only if the option was sold in the market earlier.
NSE lists strikes well beyond the likely range and adds more as the index moves, so very far OTM contracts always exist; their open interest is often concentrated from a few large writers.
Lot sizes after the January 2026 revision (Nifty 65, Bank Nifty 30, FinNifty 60, Sensex 20) convert small per-unit premiums into the rupee amount at risk per lot.

FAQ

When is a call out of the money and when is a put?

A call when spot is below the strike; a put when spot is above it.

Why are out-of-the-money options cheap?

Because the chance of the move they need is small; the price is that chance times the likely payoff.

Does delta tell me the probability an OTM option finishes in the money?

Approximately, yes; it does not tell you the chance of profit, which is lower.

What happens to an OTM option at expiry?

It expires worthless; the buyer loses the premium and the writer keeps it.

Premiums and deltas for every OTM strike

The option-chain pages show premium, implied volatility, delta and open interest for every strike from the latest close, so the price of probability is visible across the chain. The options calculator prices any strike from your own volatility and days.

Nifty option chain Options calculators

Related terms

At the Money and In the Money
Time Value, which is all an OTM option has
Volatility Skew, why OTM puts cost more than OTM calls
Strangle, the classic two-OTM-strike trade