Lesson Overview

Option Expiration

Typically you will enter positions with different expiration month and varying dates. In today's market there are weekly, monthly and quarterly options.

However most of the options that you should be trading for regular positions will be the month contracts. You should only use weekly options for earnings trades and hedging (which we discuss in other modules).

It's important to remember that most option contracts generally expire the third Friday of the expiration month unless that day is a holiday in which case the last trading day will be the previous day, or Thursday.

More Discussion

Was This Helpful? Add Comments/Questions

  • Closing and reversing the trade are the same. Exercising is actually converting from options to underlying stock.

  • First it doesn’t happen often at all – maybe 1% of the time. Second I would encourage you to listen to this podcast on how to deal with it if it happens and everything surrounding exercising: https://optionalpha.com/show-018-why-you-shouldnt-be-afraid-of-getting-assigned-stock-2-17252.html

    • JJ Thorne

      Kirk, how are we going to defend our TBT 34 butterfly, and will Brexit have an impact please?

      • Nobody knows what the impact of the Brexit vote will be and we’ll wait until afterwards to see if we need to adjust.

    • GoodGuyGaf

      Thanks for the insight and the link. I just wanted to make sure that I account for the occasional exercise so I can always be on top of managing risk in my accounts. Essentially I’ve learned that having a pre-meditated plan helps control emotional / bad decision making risk; so thank you for helping me understand how the process works with retail capital.

  • JJ Thorne

    Thank you buddy. You are better than the large size of Maalox
    !!

Show Video Transcript +

In this video, I’m going to go over option expiration. What is options expiration? You hear about it all the time and simply going back to our RB’s combo coupon example, it is the last day to close or exercise your options contract.

That’s what it means. Just like anything else, it expires, it runs out, the time is done, it’s the last day. It’s the option expiration day that you have the last chance to do something with your contract.

Now typically, you’re going to enter positions with different expiration months in varying dates, but it’s always important to know when that expiration date is.

Now again, in this example with our RB’s roast beef combo, because I love RB’s, you may not be able to see it in this particular video, but you can see right down here that the expiration date is 4/30/2009, so this is an old coupon obviously.

But you can see that this coupon expires on April 30th. Just like an options contract, the coupon is very similar. You have the choice to buy this RB’s roast beef combo for 399 before April 30th, and that’s just like an expiration day.

If you had an option, you have the choice to buy stock in Apple for example before the April expiration date, whenever that is. It’s the same type of mentality and thinking that goes into a coupon as with an option. Hopefully, that makes it a little bit simpler for everything.

Another Apple stock example: What I did here is taking a chart of Apple just recently, and I cut it off, and then I drew all these vertical green lines. These green lines represent the expiration dates for Apple contracts in the future so that they can be varying dates for expiration.

This green line right here where my cursor is is the November expiration, the next one is December, and the next one is January. You want to consider these the make-it-or-break-it points.

If you buy an option contract for December expiration which is this middle green line here, then that's the point at which either the underlying stock is going to move far enough for you to make a profit or it’s not, and you’re going to have to make a decision whether you want to get rid of that contract or whether you want to exercise it, whatever the case may be.

Now, remember that you can get rid of your options contract by reversing the order. And we've gone over those in different video tutorials. But you can reverse the order for that options contract and get rid of it before expiration.

You don’t necessarily have to wait until expiration to make a decision. As always, with our membership, we have the expiration calendar that’s right inside of our membership area. It’s always updated.

In fact, we have it always out for the next three years. In case you’re trading some of those longer term options, you know exactly when those dates are.

But this calendar is helpful because it always gives the holiday periods which are in orange, the options stop trading day which is the Friday before expiration and then the expiration day for options and also quarterly expiration which isn’t on this particular cutoff for the graph, but is on the other ones.

Some expiration day and expiration in general tips: Expiration day for equity and index options is the Saturday immediately following the third Friday of the expiration month.

If you go back here, you can see that the Saturday is the options expiration day and it’s following the third Friday of every month. On February 1, 2, 3, there’s the third Friday, expiration is that Saturday.

For American-style index options contracts, the last trading day is the third Friday of expiration month unless that day is an exchange holiday in which case, the last trading day will be the previous day or Thursday. This is a really important one to watch out for.

For instance, if Christmas or Thanksgiving or something is on the third Friday or it just happens to be a holiday on that third Friday, then it’s going to move to the previous day.

You just want to be aware of that as you’re always trading. Know when expiration is, so you don’t get caught on your heels. Continuing here with your expiration tips: For European-style index options…

And we’ve covered the differences between those two in other video tutorials more in-depth, but we’ll touch on it here as well.

But for European-style index options contracts, the last trading day will be the business day, generally Thursday, preceding the day on which exercise settlement value is calculated. I know that’s a lot, but keep rereading it.

For an American-style index option, they can exercise these any time before expiration. Now, the keyword here is “exercise.” That means you’re going to convert the option from an option to the physical underlying stock or ETF or whatever the case is.

That’s the keyword. Most people get confused in saying that American style versus European that you can’t close out of your trade until expiration. That's not the case. You can always reverse your trade and sell it back to the market or buy it back from the market.

The key here between American and European is that you cannot exercise Europeans until a specific time before expiration. With American style options which are generally what we trade here, these can be exercised at any time before expiration.

If your expiration is 30 days away, you can right now convert it to stock and buy that stock. Again, a European-style index option may only be exercised during a specific period before expiration.

Ow generally, this is the last Friday before expiration day. That’s the last Friday before that Saturday when they expire. As always, I hope you guys enjoyed this video. And if you like this video, please use the links below to share it with any of your friends, family or colleagues on your favorite social network.

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