When Do Options Expire?
Options trading is one of the most common strategies that traders use. All options have expiration dates, which typically follow the same guidelines. Once the contract passes the expiration date, it’s worthless. Therefore, it’s essential to know when an option contract expires and when to exercise an option in order to maximize your profit. Take a closer look at options expiration dates and how they can affect your strategy.
- At the expiration time, an option contract is rendered null and void.
- Typically, traders can exercise or sell their options on the third Friday of the expiration month.
- Learning how expiration dates affect the value of the options is crucial for making a profit.
What Are Options?
An option is a form of a derivative security, meaning you’re not trading with the actual security. When an investor or trader buys an option contract, they then have the right, but not the obligation, to buy or sell an underlying asset at the set price (strike price) on or before a set date (expiration date). Each option contract has two parties: a buyer and a seller. You can purchase options through a brokerage account, just like most other assets, like stocks. For stock options, each option usually represents 100 of the same type of shares.
Options can enhance and strengthen your portfolio through added protection, income, or even leverage. Usually, you can find an option contract that matches your investing goals. For example, you could purchase an option as a hedge to limit potential losses in a declining market. In fact, options were actually created specifically for hedging, though they have several other functions today.
Speculation is another reason to trade options. Based on fundamental analysis, technical analysis, or both, you could predict that stock prices will go up. By buying an option, instead of buying the stock right away, you have leverage. The price of the option premium may only be a few cents or dollars compared to the stock’s full price, so you would lose less if the price doesn’t increase as much as you anticipated.
As with all stocks and bonds, options trading involves taking risks. The risk involved in options trading is mainly due to the leveraged nature of stock options. You need to be aware of the risks before entering into options trading.
Options can either be call options or put options. Call and put options both wager that stock prices will do the opposite of what is anticipated. Put options give you the ability to sell stocks, while call options give you the ability to buy stocks. Generally, the longer an option has to expire, the more value it has because it has more time to reach its strike price. Options often rapidly lose their value the closer they get to their expiration time, so it’s essential to always have an eye on the expiration.
Here’s what you should know about call options and put options:
A call option, often just called, a ‘call,’ is a contract that allows the buyer to purchase the stock prior to the expiration date. A trader will buy a call option if they think the asset’s price will rise before the expiry time. The call option gives the buyer the right to buy the underlying asset at a set price by the option’s expiration time. The seller has the obligation to sell the stock at the strike price if the buyer chooses to exercise their option.
For example, a trader purchases a stock call option with a $12 strike price. Over the next few weeks, the stock’s price rises to $14, and the buyer exercises their option, meaning they make $2 profit for each share the option represents.
Since the buyer is only purchasing an option to buy the shares later, they aren’t obligated to actually buy the shares if the price remains the same or drops. If, for example, the trader purchased a stock call option with a $12 strike price and the stock dropped to $10 per share, they can let the contract expire and only lose the initial premium.
For example, a trader buys a put option with a strike price of $15. They have until the option expiry time to sell that stock at $15 regardless of whether the share price goes down. If the price drops to $14, the trader can sell the shares and make $1 profit.
When Do Options Expire?
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Unlike stock shares, you can’t hold an option indefinitely. We know that options have expiration dates, but the expiration date and time are slightly different. An option expiration date is the actual day the option expires, while the time is the deadline for exercising the option. Although traders only need to worry about the expiration date, it is interesting to understand option expiry time.
Monthly options are the most common options type.
When do monthly options expire? Usually, the third Friday of the expiration month is the last day to trade an option. However, the actual option expiry date is not until Saturday. If the Friday falls on a designated holiday, the last trading opportunity is Thursday. The third Friday of the month was chosen for expiry because it usually has the least scheduling issues.
Options contracts usually expire in monthly intervals, for example, a contract could have a three-month expiration date. However, certain securities have quarterly and weekly options. Quarterly options expire on the last Friday of the quarter. Thus, the same stock could expire on the third and fourth Friday of a month. Weekly options are usually listed on a Thursday and expire the following Friday. Weekly options allow investors extra opportunities to act on material news, such as news reports or industry reports.
The expiration time refers to the time on the expiration date when all exercise notices must be received. Usually, the last trading opportunity for a monthly option is just after market close (5:30 p.m. EST) on the third Friday of the expiration month.
The option expiry time is technically at 11:59 a.m. EST on the expiration date, which is the third Saturday of the month.
Many public option holders work with brokers who have different expiration times. A public option holder must declare their notice by 5:00 p.m. on the expiration date to give the broker time to notify the exchange of the trader’s intent before the actual expiration time. Different exchanges have different time limits to receive notifications. For example, the Chicago Board Options Exchange sets a 3:00 p.m. cutoff time for traders on the last trading day.
Time is a component in the option price. As the option expiry time nears, the less value an option will have. The reason for the decrease in value closer to the expiry date is because the chances of a price move diminish the closer it gets to that date. A three-month option is usually more valuable than a one-month option since there’s more time for the price to move.
Options expiration dates play a huge role in the trading process. If you wait too long to exercise your option, you could end up taking a smaller profit. If an asset doesn’t move the way you expected, you can always let the option expire, and you only lose the premium paid. It’s important to thoroughly research each option you’re interested in to make sure you gain maximum profits.