Out of The Money (OTM): 2025 Guide for Australian Investors

Out of The Money (OTM) is a term every Australian options trader should know. As 2025 brings new volatility and regulatory tweaks to the ASX and global markets, understanding OTM isn’t just textbook knowledge—it’s a practical skill that can shape your portfolio’s success (or protect you from steep losses).

What Does ‘Out of The Money’ Actually Mean?

In the world of options trading, an option is Out of The Money (OTM) when exercising it would not be profitable based on the current price of the underlying asset. For call options, this means the underlying security is trading below the option’s strike price; for puts, it’s trading above. In plain English: the option’s just not worth using—yet.

• Call Option OTM: Stock price < Strike price
• Put Option OTM: Stock price > Strike price

For example, if you hold a call option to buy BHP shares at $50 and the current market price is $48, your option is OTM. It’d cost more to exercise the option than just buying the shares outright.

Why OTM Options Matter in 2025’s Market

Australian investors are seeing a surge in options trading, especially as the ASX’s new derivatives rules—introduced in late 2024—have made options more accessible for retail traders. With increased market volatility expected in 2025 due to global inflation trends and ongoing RBA rate shifts, OTM options are drawing attention for several reasons:

• Lower Premiums: OTM options are typically cheaper to buy, allowing traders to speculate on big moves with less upfront capital.
• Defined Risk: The maximum loss is limited to the option’s premium, making them attractive for those looking to manage risk in uncertain times.
• Strategic Plays: Many popular strategies (like buying OTM calls before anticipated earnings or using OTM puts as insurance) hinge on the OTM concept.

In 2025, the ASX has also enhanced reporting requirements for options positions, prompting more transparency and education around OTM risks. Local brokers, such as SelfWealth and CommSec, have rolled out updated tools to help investors visualise the probability of OTM options expiring worthless—a crucial insight for risk management.

OTM: Strategy, Risk, and Real-World Examples

So, why would anyone want to buy an option that’s OTM? The answer lies in leverage and asymmetric risk. OTM options offer the potential for large percentage gains if the market moves dramatically in your favour, but with a high risk of expiring worthless.

Example: OTM Call Option in Action

• Suppose you expect CSL shares to surge on a new drug approval.
• You buy an OTM call with a $320 strike (shares currently at $305) for a $1.00 premium.
• If CSL jumps to $330, your option is now ‘In The Money’—and could net a tidy profit, minus your premium.

But beware: If CSL stays below $320, your OTM call expires worthless, and you lose your $1.00 per share premium. This is why OTM options are often used for hedging or speculative plays, not conservative investing.

Australian tax rules in 2025 continue to treat expired OTM options as a capital loss, which can be used to offset other gains—an aspect increasingly relevant as investors look for tax efficiency in their portfolios.

Key Takeaways for Australian Investors

• OTM options can be a cost-effective way to speculate or hedge, but the risk of total loss is real.
• 2025’s updated ASX regulations and broker tools are making OTM trading more transparent—but not risk-free.
• Always consider your risk tolerance and portfolio goals before using OTM options, and watch for tax implications with expired contracts.