Out-of-the-Money (OTM)

Out-of-the-Money (OTM) means an option contract has no intrinsic value right now—it would be worthless if exercised today. You'll hear this term constantly when trading options (contracts that give you the right to buy or sell a stock at a set price). It matters because OTM options are cheaper but riskier: they need the stock to move in your favor just to break even. For example, if you buy a call option (the right to buy) giving you the ability to purchase a stock at $50, but the stock is trading at $45, that option is out-of-the-money. The opposite is in-the-money (ITM), where the option has real value.