OTM (Out of The Money) describes options that have no intrinsic value and would not be profitable to exercise immediately. For call options, OTM means the underlying price is below the strike price, while for put options, OTM means the underlying price is above the strike price. OTM options consist entirely of time value.

OTM options are less expensive than in-the-money options but require larger price movements to become profitable. These options offer higher percentage returns if successful but have lower probability of success. OTM options experience rapid time decay as expiration approaches, making timing crucial for profitability.

Real-world example: A call option with $160 strike is OTM when the stock trades at $155, having no intrinsic value and requiring the stock to rise above $160 plus the premium paid to become profitable at expiration.