If you’re just starting in options trading, understanding how stock options expiration dates and cycles work is extremely important. Options contracts are time-sensitive derivatives and as such you need to know the date on which your options contract will expire before you even enter the trade. As an options trader, you need to be fully aware of what happens when you hold an option through expiration and how options calendars and cycles work.
- The expiration date is the last date on which the options contract is valid
- Options can be weekly, monthly and long term expiration schedules known as LEAPS
- Options investors can choose to exercise their option or let it expire worthless
What is a Stock Option Expiration Date?
A stock options expiration date represents the last day an options contract is valid. On or before the date of the options expiration, investors will have to decide what to do with their options trade, let it expire, or close it out.
Before the options contract expires, investors can choose to close out the option position. This is referred to as exercising the option and allows investors to realize gains or losses on the trade.
When do Options Contract Expire?
When it comes to stock options, there may be a variety of option expiration dates depending on the stock or index you are trading. According to the NASDAQ, options contracts expire at 11:59 AM EST on the expiration date.
Public holders of options contracts must liquidate their options positions no later than 5:30 pm on the business day preceding the expiration date.
Monthly Options Expirations
The majority of US exchange-traded options contracts follow a predetermined expiration schedule. Stock options listed on US exchanges will expire on the Saturday that follows the third Friday of the month. However, there is an exception that occurs in the case of a market holiday, in which case the expiration will take place on the Thursday prior to Friday.
Recommended Reading: Why Do Some Stocks Not Have Options?
It’s worth noting that the majority of traders do not hold options contracts until the expiration date, they will typically get out of the position rather than letting it expire.
Weekly Options Expirations
It’s worth noting that there are weekly options contracts that are shorter than monthly contracts. They expire every week on Friday after market close. Weekly options contracts are available for very liquid stocks. If you decide to trade shorter-term options contracts, you need to closely monitor your position and be conscious of the shorter expiration schedule.
It’s worth noting that options can have longer-term options expirations known as LEAPS. LEAPS is an acronym for Long-Term Equity Anticipation Securities and are options contracts with expiration dates that are longer than one year and up to a maximum of 3 years.
Most of the time in order to trade LEAPS, you have to get special permission from your broker as they tend to be reserved for institutional level investors or traders.
Holding an Option Through the Expiration Date
If you are holding a call option with the stock price trading below the current strike price that option has no value at expiration. On the flip side, if you’re holding a put option with the stock price trading above the strike price at expiration, that option has no value. In both of these cases, the stock option ends up expiring worthless.
Knowing where the price of the stock is in relation to its call or put option strike price right before expiration is very important. Below are three choices you can make as an option approaches its expiration date.
- Sell the options contract
- Let the expiration happen
- Exercise the option
Below are some important things to remember when it comes to in-the-money expirations and out-of-the-money expirations.
In-the-Money Expiration (ITM)
If an option is in-the-money it is said to have “intrinsic value”. It means that if the option is exercised right away it will provide profit right immediately. If an option is in the money and approaching expiration you can sell it as most investors do.
If you let the option expire in the money with some intrinsic value, the option will be assigned. When an options contract gets “assigned”, it means that the corresponding amount of stock will either be bought or sold (depending on if it was a put or call option) and then added to the trader’s account. Most people usually sell in the money options prior to expiration, unless they want to get assigned stock.
Out-of-the Money Expiration (OTM)
Out-of-the-money options hold zero intrinsic value. If an options contract expires out-of-the-money nothing happens. There are no shares that get assigned and the entire options position expires worthless. If you are selling options contracts ( receiving premium ) this is the outcome you want.
Examples of Puts and Calls at Expiration
Below are some examples that can help make sense of call and put options at expiration.
Long Call Option at Expiration
- If a long call option is in the money at least $0.01 at expiration, an investor will get assigned 100 shares of stock at the options strike price and added to the investor’s account.
Short Call Option at Expiration
- If a short call option is in the money at least $0.01 at expiration, 100 shares of stock will be sold short at the options strike price and added to the investor’s account.
Long Put Option at Expiration
- If a long put option is in the money at least $0.01 at expiration, 100 shares of stock will be sold short at the options strike price and added to the investor’s account.
Short Put Option at Expiration
- If a short put option is in the money at least $0.01 at expiration, an investor will get assigned 100 shares of stock at the options strike price and added to the investor’s account.
It’s critical for investors to be aware of options positions that are expiring and when they are approaching expiration. You need to make sure you have sufficient capital in place in case your option contract expires in the money and you end up getting assigned shares of stock.
If you don’t have the necessary funds to cover the assignment of shares, this can cause some serious financial damage. As such, it’s recommended to always liquidate your options positions before expiration unless you plan on taking assignment of shares.
Can I Buy Options On The Expiration Day?
The short answer is yes. However, buying options on the day of expiry is very risky due to lower liquidity and wider bid/ask spread. The options doesn’t expire until the close of the market on expiration day.
What Happens If I Don’t Sell My Options On The Expiration Date?
If the option expires in the money, you will be assigned shares. If an option expires out of the money, the option expires worthless and nothing happens