Options Don’t Expire On The Third Friday Of Every Month (Technically)

If you’ve thought all along that options expire on the third friday of every month you really need to read this. And I thought it would be fitting given that we are close to expiration right now and I’ve gotten a lot of emails about this particular subject. But what most people don’t know is that overnight trading can dramatically effect your positions.

The Friday Deadline

Here’s the skinny on options expiration. Options do expire at 4 p.m. on the third Friday of the month in the sense that they no longer trade. Here’s the catch – the stocks themselves however do keep trading after hours!

So what could be an in-the-money (ITM) close at 4 p.m. on Friday can be out-of-the-money (OTM) by 5 p.m., or vice versa. Again not knowing this one minor detail can be the difference between making money and losing money.

Check out this old chart of AAPL earnings cap to get an idea of just how far a stock can move overnight.

Exercising ITM Options

While there are a couple differences between how brokers look at ITM options these days, most ITM options will be automatically exercised based on the 4 p.m. closing price. Some may now be automatically exercised even if they are as little as a penny ITM – while other brokers have different requirements.

Regardless of wether you choose to exercise your option or not, you have to make the decision fast! Even though options technically don’t expire until noon on Saturday (again not when they are last traded in the open market), you need to make your final decision ASAP.

Most brokers require you to contact your contact them either way by 5:30 p.m. on Friday or they will usually make the decision for you.

What About Index Options?

Some index options are referred to as “cash settled” in which the options occur primarily in the underlying instrument and at expiration cash changes hands not necessarily the underlying security.

But there is a little twist with Index Options which expire on a completely different day and have a very unique overnight trading policy. I’ll leave this for you all to help answer in the comments section below.

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  • artsyprincess

    Here's a scary story I've heard on an options forum. An investor was long slightly on OTM GOOG calls and decided to just let them expire into the close of Friday expiration. It traded after hours and made those calls ITM and was automatically assigned to him. The shares then opened lower on Monday and the broker was asking for money on shares that were now "underwater" so to speak. From this I'll learn to close out these types of positions so I don't have to deal with this kind of stuff.

    Another topic, what's with Index options? Is it a Thursday close? Hard for me to find out the exact information.

    • Kirk – Admin

      Oh yeah not good and especially since GOOG is such a high valued stock the prices along for the shares are expensive and could cause massive losses. Thanks for sharing the story!

    • jnorin

      Cash settled index options (RUT, SPX, etc.) stop trading on Thursday, but settle at the opening price on Friday. Therefore, you are exposed to the overnight change in price of the index if you don't close out positions on Thursday. To make it even more confusing, the settlement prices for these isn't necessarily the same as what the index shows right at the opening. It is based on the opening prices of the individual components in the index, which may take several hours to be posted. You can find the settlement values on the CBOE website:
      http://www.cboe.com/data/Settlement.aspx

      • Kirk – Admin

        Thanks John! Yeah the key there that I'm glad you brought up is that the actual settlement prices may be very different. Even if the indexes open, a group of securities may not have traded right at 9:30 and could swing the settlement price dramatically.

        Thanks again for the great comment and link!

  • artsyprincess

    jnorin,

    Thanks for the informational reply. I have one last question as to options on index that aren't closed but expire ITM. What does it mean they are "cash settled"? Is money taken out of my account automatically to settle the options that expire ITM?

    • Kirk – Admin

      Cash settled means that at settlement if you decide to exercise the options you don't get the underlying security. In the case of the indexes, you wouldn't be given shares in the indexes because there are none – instead you would get the cash value of the contract.

      Does this help?