Out of the Money (OTM) refers to an options contract that currently holds no intrinsic value. In simpler terms, it means the option would not yield a profit if exercised immediately. For a call option, this occurs when the strike price is higher than the current market price of the underlying asset. Conversely, a put option is considered OTM when the strike price is lower than the current market price.

For example, if a call option gives the right to buy a stock at ?1,000 while the stock is trading at ?950, the option is OTM because exercising it would result in a loss. Similarly, a put option with a strike price of ?900 when the stock trades at ?950 is also OTM. Such options derive their value purely from time value and volatility, not from immediate profit potential.

Traders often use OTM options for speculative strategies due to their lower premiums compared to In the Money (ITM) or At the Money (ATM) options. While they offer high leverage and potential returns if the market moves favorably, they also carry a higher risk of expiring worthless. Hence, understanding market direction and volatility becomes critical when trading OTM options.

In professional trading and risk management, OTM options are also used for hedging purposes. For instance, investors may buy OTM put options to protect a portfolio against a sharp market decline. Although the cost is lower, the protection activates only beyond a certain price movement.

Overall, Out of the Money options play a significant role in options trading by offering a balance between cost and potential reward. However, traders should evaluate factors like time decay, volatility, and market trend before incorporating OTM options into their strategies.