How OTM Call Options Work in the Stock Market?

28.May.2025
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Options trading can feel like a game of chess with financial terms; some of them are intuitive, and others… not so much. One term that tends to throw people off? OTM call options. If you’ve ever wondered, “What does out of the money even mean?”, or “Why would anyone buy something that isn’t profitable yet?”—this blog’s for you.

Why Should You Care About OTM Calls?

Let’s say you’re watching a stock that you believe is about to rally. You want to profit from that move but maybe you don’t want to invest ₹1 lakh to buy the shares directly. That’s where OTM (Out of The Money) call options come into play. They’re like placing a bet on the stock’s future but with a lot less money on the line. So why do people use them? Are they risky? Can they be profitable? Let’s take it step by step.

Understanding OTM Call Option

An OTM call option is a type of option contract that gives you the right to buy an asset at a higher price than its current market price. Let’s break that down with a quick example: If a stock is trading at ₹500, and you buy a call option with a strike price of ₹550, your option is not worth anything right now. That’s what we call out of the money. You wouldn’t exercise that option today because you’d be paying more than the going rate. But if the stock rises above ₹550, your option could suddenly be worth a lot.

Out of the Money Meaning

It simply refers to an option that would lead to a loss if exercised at this moment.

A call option is out of the money when its strike price is above the current market price of the asset.
A put option is out of the money when its strike price is below the current market price.

In both cases, the option has no intrinsic value right now, but it still might gain value before it expires. Think of it like this: You’re buying the possibility that the stock gets there, but it’s not the guarantee.

Explaining OTM Call Option with an Example

Let’s say shares of XYZ Ltd. are trading at ₹2,400. You buy a call option with a strike price of ₹2,500, expiring in 30 days. Right now, that option is out of the money. No one would buy the stock at ₹2,500 when it’s available for ₹2,400. But if XYZ jumps to ₹2,600 next week? Now your option gives you the right to buy it at ₹2,500—earning you a ₹100 profit per share (minus the premium you paid, of course).

Can OTM Call Options be Profitable?

Here’s the tricky part: even though these options are “out of the money,” they aren’t worthless. They have what’s called time value. Traders are willing to pay for the chance that the option becomes profitable before it expires. Why? Because:

Stocks are unpredictable
News, earnings reports, or trends can cause sudden jumps
You don’t need the stock to rise a lot—just enough

If your ₹10 option becomes worth ₹40 when the stock rallies, that’s a 4x return. Not bad for a calculated risk.

Benefits of using OTM Options

Sure, they’re riskier. Most OTM options expire worthless. But that doesn’t stop traders from using them. Here’s why people still go for it:

They’re cheap: You pay a small premium upfront, making them accessible.
Big upside potential: Even a modest rise in stock price can lead to huge returns.
Defined loss: Worst case? You lose the premium you paid and nothing more.
Strategic hedging: Investors sometimes use OTM calls to balance risk in other parts of their portfolio.

It’s like buying a movie ticket to a thriller; you know the outcome is uncertain, but the excitement (and potential payoff) is worth it.

Final Thoughts

So, now you know that what is otm, what it means to be out of the money, and how these options work in real life. OTM call options aren’t magical shortcuts to wealth. But they can be strategic tools when used wisely. Like any investment, it’s all about risk vs. reward. If you’re betting on momentum, have a strong conviction, and can afford the potential loss, OTM calls might just be the high-reward opportunity you’re looking for.

FAQs

What does ITM mean in options trading?

ITM stands for “In the Money.” A call option is ITM when its strike price is below the current market price. So, if the stock is ₹1,000 and your call option strike is ₹950, it’s in the money.

When is it a good time to buy OTM call options?

OTM calls are ideal when you’re expecting a strong move upward in the stock. Maybe there’s a product launch, a big announcement, or just technical momentum building.

Can you give an example of an OTM option?

Let’s say Infosys is trading at ₹1,300. You buy a call option with a strike price of ₹1,400. That’s an out-of-the-money call until the stock crosses ₹1,400.

Why do traders choose to buy OTM calls?

Because they offer high returns with limited risk. It’s speculative, sure but if the timing is right, the profits can be significant compared to what you risk.

Is it better to buy ITM or OTM call options?

That depends on your style.

ITM: More expensive, but safer
OTM: Cheaper, riskier, but higher reward potential If you’re new to options, many traders recommend starting with ITM calls to understand the mechanics before trying riskier strategies.