Stocks and option contracts differ in multiple ways, including expiration date.
While stocks can exist in perpetuity, options expire and cease to exist.
Understanding when options expire can help you make the right trades at the right time.
David Jaffee of BestStockStrategy.com stresses the importance of strategically choosing your trades instead of trading too big or too often.
If you want to become a profitable trader, understanding the basics like option expiration dates is a must.
So, when do options expire?
Do options expire?
If you are not familiar with options trading, the concept of an expiration date might be new.
Options are contracts between two parties that give one party the right to buy or sell shares of an underlying asset at a specified price.
The option buyer is not obligated to exercise their right and they can always close out the option position prior to expiration.
Stocks offer a portion of ownership of a company, so they can exist continually.
Options, on the other hand, are contracts that grant the right to buy or sell stock at the strike price.
Option contracts do not exist forever, so they have expiration dates.
What is an option expiration date?
When a trader buys an option, they are purchasing the right to buy or sell stock at the predetermined price by the set expiration date.
If the option owner wants to exercise their right to buy or sell the underlying asset, they must do so on, or before, the date in the contract (or they can simply close out their existing option position for a gain or loss).
Once an options contract has expired, it can no longer be traded.
Paying attention to when options expire is crucial to become an options trading genius.
Expiration dates can also have a significant impact on the value of the option contract.
As option expiration dates get closer, the extrinsic value of the option decreases.
The holder of an option contract has three choices as the expiration date approaches. They can close the option, exercise the option and buy or sell shares, or let the option expire (and potentially take assignment of the shares, also referred to as “get assigned”).
If you are looking for a better way to invest, consider selling option premium.
Expiration Time vs. Expiration Date
Expiration time is different than expiration date.
Expiration time, however, refers to the precise time that the option expires and the contract can no longer be trader.
Usually expiration time is on expiration date, and it's usually 1 hour after the market closes on the expiration date.
At the expiration time, any rights or obligations granted by the option contract have expired.
What happens when stock options expire?
There are two possible outcomes if an option expires.
- The option can expire out of the money and be worthless.
- The option can expire in the money and have intrinsic value and the shares can get assigned.
Out of the Money Option Expiration
If an option expires out of the money, nothing more happens.
The owner of the option contract does not buy or sell shares of the underlying asset and the position expires worthless. It will then disappear from the trader’s account.
In the Money Option Expiration
If an option expires in the money, it is assigned, the specified amount of stock is bought or sold, and it is added to the trader’s account.
Options traders that buy option contracts must pay close attention to expiration date.
If they do not have the capital in their account to cover the purchase or sale of 100 shares for every option contract, they can be forced to liquidate the shares.
Sell Options Before Expiration
Options can be sold before their expiration date if the trader thinks this is a profitable move.
Part of the option premium is attributed to the amount of time left before a contract expires. Time value can make it profitable to sell an option and collect the premium.
Selling option premium is the most successful options trading strategy to earn consistent income.
Instead of gambling by buying call or put options, David Jaffee teaches his students to minimize risk and sell option premium.
When a trader sell an option contract, they collect option premium which they keep regardless of whether the option expires.
If you want to learn the most efficient and simplest way to become a successful trader, enroll in the Options Education Course at BestStockStrategy.com.