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What Are OTM Call Options? A Simple Guide for Beginners

24 Sep, 2025

4 mins read

Options trading offers different ways for traders to participate in the market, depending on their risk appetite and strategy. Among these, OTM Call Options (Out of the Money Call Options) are a popular choice for beginners and experienced traders alike.

This guide explains what OTM call options are, how they work, their advantages and risks, along with real-world examples.

What is an OTM Call Option?

An OTM (Out of the Money) Call Option is a type of options contract where the strike price of the option is higher than the current market price of the underlying asset.

For example, if a stock is trading at ₹1,000 and you buy a call option with a strike price of ₹1,100, that option is considered “out of the money.”

ITM (In the Money): Strike price is below the current market price.
ATM (At the Money): Strike price is equal (or very close) to the current market price.
OTM (Out of the Money): Strike price is above the current market price (for calls).

Since OTM options don’t have intrinsic value, they are usually cheaper than ITM or ATM options.

How Do OTM Options Work in Trading?

OTM call options derive their value from the possibility that the underlying asset’s price will rise above the strike price before expiration.

If the price rises above the strike price, the option moves towards being in the money, giving the trader potential profit.
If the price remains below the strike price, the option expires worthless.

Because of this, OTM in options is often considered a speculative tool — offering high potential returns if the market moves in the trader’s favour, but also higher chances of loss.

OTM vs ITM vs ATM Options

Understanding the differences between these three is crucial for beginners:

ITM (In the Money) Call Options: Higher premium, but more likely to generate profit since strike < current price.
ATM (At the Money) Call Options: Balanced risk and cost, strike price ≈ current price.
OTM (Out of the Money) Call Options: Lower premium, but need significant price movement to be profitable.

Option Type	Strike Price vs Current Price	Premium	Profit Potential	Risk
ITM	Below Current Price	High	Moderate	Lower
ATM	At Current Price	Medium	Balanced	Medium
OTM	Above Current Price	Low	High (if price rises)	Higher

Advantages of OTM Options

Lower Cost – OTM options are cheaper, allowing traders with smaller capital to participate.
High Leverage – Small price moves can generate significant percentage gains.
Defined Risk – The maximum loss is limited to the premium paid.
Speculative Opportunity – Useful for traders expecting strong price movement in the underlying asset.

Risks of OTM Call Options

While attractive, OTM options come with risks:

Higher Probability of Expiry Worthless – Most OTM options do not reach the strike price.
Time Decay (Theta Risk) – Value erodes as expiry approaches if the stock doesn’t move favourably.
Market Volatility – Unfavourable movements can wipe out the entire premium quickly.

Thus, OTM options are best used with proper strategy rather than random speculation.

Example of OTM Call Option in the Stock Market

Suppose:

Stock XYZ trades at ₹500.
You buy a Call Option with strike price ₹550 for a premium of ₹10.
If XYZ rises to ₹570 before expiry:
- Intrinsic value = ₹570 – ₹550 = ₹20.
- Profit = Intrinsic Value – Premium Paid = ₹20 – ₹10 = ₹10 per share.
If XYZ stays at ₹500 or below ₹550:
- Option expires worthless.
- Loss = Premium paid = ₹10.

This shows how OTM options can either generate high returns or result in a total loss of the premium.

When Should Traders Use OTM Options?

High Volatility Expectations – When you expect a strong upside movement.
Event-Driven Trading – Before corporate announcements, results, or market events.
Low-Cost Exposure – To take part in market moves with limited capital.
Hedging Purposes – Sometimes used as a hedge against short positions.

However, they should be avoided for long-term holding since time decay reduces their value.

Conclusion

OTM Call Options provide traders with a cost-effective way to participate in market rallies. While they offer high reward potential, they also carry higher risks of expiry worthless due to time decay and price inaction.

For beginners, OTM options should be used cautiously — ideally with small capital allocation and a clear strategy. Understanding the difference between ITM, ATM, and OTM in options is the first step to making informed trading decisions.