Do Not Call
Explore what Out-of-the-Money (OTM) call options are, how they function, and when traders consider using them as part of their options strategy.
Options trading involves several moving parts, and one of the foundational concepts is understanding the moneyness of an option—whether it's In-the-Money (ITM), At-the-Money (ATM), or Out-of-the-Money (OTM). Among these, OTM call options are often popular among traders due to their lower cost and potential for high returns. However, they also carry a higher risk of expiring worthless.
A call option is a contract that gives the buyer the option to buy a specific asset at a pre-decided price on or before a particular date.
Buyer pays a premium to the seller (option writer)
If the asset’s price rises above the strike price, the buyer can profit
Call options are used by traders who anticipate that the price of the underlying asset will go up.
An Out-of-the-Money (OTM) call option is a call option, the strike price of which is higher than the ongoing market price of the underlying asset.
If NIFTY is trading at ₹18,000 and you buy a call option with a strike price of ₹18,200, it is considered OTM.
OTM call options have no intrinsic value—only time value. They will become profitable only if the asset’s price rises above the strike price before expiry.
Traders buy OTM calls when they expect a significant upside in a short period.
Feature |
Description |
|---|---|
Lower Premium |
Cost less than ITM or ATM options |
No Intrinsic Value |
Profit only if underlying price exceeds strike price |
High Risk, High Reward |
Potential for large gains, but often expire worthless |
Ideal for Short-Term Speculation |
Common in directional trading when bullish on the asset |
Strike Price = ₹18,200
Spot Price at Expiry = ₹18,300
Premium Paid = ₹20
Profit = (Spot Price – Strike Price – Premium) = (₹18,300 – ₹18,200 – ₹20) = ₹80
If the spot price stays below ₹18,200, the option expires worthless, and you lose the premium of ₹20.
Advantages |
Explanation |
|---|---|
Low Entry Cost |
Allows traders with limited capital to participate in big moves |
Leverage |
A small move in the underlying can result in a large percentage gain |
Defined Risk |
Maximum loss is limited to the premium paid |
Scalable |
Useful for traders looking to buy multiple lots at low cost |
It’s important to understand that most OTM options expire without any value unless a strong price movement occurs.
Risk |
Impact |
|---|---|
Time Decay (Theta) |
OTM options lose value quickly as expiry nears |
Low Probability of Profit |
Price must rise significantly to reach breakeven |
Volatility Sensitivity |
High implied volatility can inflate premiums |
No Intrinsic Value |
Even if price moves slightly, the option may still expire worthless |
Timing and correct strike selection are critical for using OTM calls effectively.
Market Condition |
Strategy |
|---|---|
Strong Bullish Sentiment |
Buy OTM calls to capitalise on expected rally |
Event-Based Trading |
Ahead of earnings announcements, policy changes, or news |
Cost-Controlled Bets |
When capital is limited and you’re willing to take higher risk |
Hedging Short Positions |
As an upside insurance at a lower cost |
Key tips to trade OTM call options effectively include:
Choose expiry carefully: More time gives the asset a better chance to reach strike price
Use support and resistance levels: Helps identify realistic strike levels
Monitor implied volatility: Higher IV inflates premiums; enter when IV is stable
Avoid last-minute entries: Time decay increases sharply close to expiry
OTM call options provide an affordable way for traders to participate in upward market movements with limited risk and high potential reward. However, due to their higher failure rate, they are best suited for well-researched trades, event-driven strategies, or part of diversified options portfolios. Understanding their dynamics, especially around expiry, is crucial for maximising their benefits and limiting downside.
This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.
OTM call options have a strike price higher than the current market price of the underlying asset. They carry no intrinsic value, which makes them high-risk since the entire premium can be lost. Beginners should be aware of their speculative nature, time decay, and volatility impact.
Yes, if the underlying asset’s price moves above the strike price plus the premium paid before expiry.
Breakeven = Strike Price + Premium Paid
Yes. If their premium increases due to volatility or price movement, you can sell them on the exchange before expiry.
OTM (Out-of-The-Money) call options have a strike price higher than the current market price of the underlying asset. Regulated by SEBI, these options carry no intrinsic value, and their premium is based solely on time value, making them speculative instruments in markets like NSE or BSE
OTM options are used in strategies involving expected price movements of the underlying asset, offering lower premium costs and defined exposure. They may support hedging or diversification objectives and are permitted within SEBI’s regulated framework for derivative trading activities.
OTM options have no intrinsic value since their strike price is unfavourable compared to the market price. However, they hold time value, reflecting potential future price movements, influenced by volatility and time to expiration, as traded on SEBI-regulated exchanges like NSE or BSE.
