In options trading, understanding the expiration date is crucial for making informed decisions and managing risk effectively. The expiration date marks the last day an option contract is valid, and it is the last date where the option may be exercised, sold, or allowed to expire worthless.
Whether you’re a seasoned trader or just getting started, knowing how option expiration works can help you plan your trades, assess potential profits and losses, and understand key factors like time decay. In this article, we’ll explore what you should know about expiration dates in options trading and how they impact your strategy.
Understanding expiration dates in options trading
Understanding the expiration date is critical to options trading. It determines how options behave as expiration nears, impacts risk management, and influences profit and loss outcomes. By staying aware of expiration timelines, traders can make more informed decisions to manage risks and potentially enhance the effectiveness of their strategies.
Types of options expiration dates
In options trading, the expiration date is the date on which an options contract expires and can no longer be exercised. Different types of expiration dates exist based on how frequently options contracts expire and how they are structured. Here are the most common types:
Monthly contract expiration
A monthly options contract expiration refers to the date on which an options contract, typically traded on a monthly cycle, expires, which usually falls on the third Friday of each month, giving traders a longer timeframe to potentially capitalize on market movements compared to shorter-term options like weekly contracts; when the contract expires, it is either exercised or becomes worthless depending on the underlying asset’s price relative to the strike price.
Weekly contract expiration
A “weekly options contract expiration” is a contract that expires every Friday, unlike standard monthly options, which expire on the third Friday of each month. Weekly options offer a shorter timeframe for trading, allowing traders to act on quick market movements within a single week. However, they can also trade a weekly option that doesn’t expire for several months.
Daily contract expiration
A “daily options contract expiration” refers to an options contract that expires at the end of the trading day, also known as a “zero days to expiration” (0DTE) option, generally meaning it only has one day until it expires and is primarily used for short-term trading strategies to trade on intraday market movements.
Long-Term Equity Anticipation Securities (LEAPS)
LEAPs typically have expiration dates that are longer than one year out, ranging from one to three years into the future. Thus, they are considered “long-term” options compared to standard options with shorter expiration periods. Most LEAPs are listed with an expiration date in January, meaning they can expire in January of a future year.
How to choose an expiration date for options
Similar to creating a price forecast for the underlying asset in an options contract prior to selecting a strike price, traders must also spend time forecasting how long it will take for the trade to become profitable. Begin with an outlook and then select an option that aligns with this.
Additional tools to use for selecting an expiration date include:
- Volatility: Look at either implied volatility (IV) or historical volatility (HV) data
- The Greeks: Review delta (an option’s sensitivity to the underlying stock price) or theta (measures the value lost on an option from time passage, aka time decay)
- Goals: Consider what options strategy to use and your investment objectives
Expiration example
Suppose you purchase a call option on a stock with a strike price of $100, set to expire on the third Friday of the current month. If, on the expiration date, the stock is trading at or below $100, the option loses its value and expires. In this scenario, the buyer incurs a loss equivalent to the premium paid for the option.
Breaking Into Options Trading with Technology
Moomoo provides a user-friendly options trading platform. Here’s a step-by-step guide to get started:
- Navigate to your Watchlist and click on the “Detailed Quotes” page for the selected stock.
- Tap Options > Chain on top of the page
- By default, all options with a specific expiration date will be shown. To view only calls or puts, select “Call/Put.”
- You can choose a different expiration date by selecting the date you want to switch to.
- Out-of-the-money options will be displayed in white, while in-the-money options will be displayed in blue. You can scroll horizontally to view additional information about the available options.
- You can switch between various trading strategies at the bottom of the screen.
FAQs about options expiration date
What happens to options positions on expiration day?
On options expiration day, “in-the-money” (ITM) options are typically automatically exercised, meaning the holder will buy or sell the underlying asset at the strike price. Conversely, “out-of-the-money” (OTM) options expire worthless, essentially losing the premium paid for the option contract. If an investor doesn’t want their ITM option exercised, they must explicitly instruct their broker not to exercise it before expiration.
What happens if I don’t close my options on expiration?
If you don’t close (sell to close) your long options positions before they expire, any ITM options will be automatically exercised, meaning you will be obligated to buy (for calls) or sell (for puts) the underlying asset at the strike price. Any OTM options will expire worthless, resulting in the loss of the premium you paid for the contract.
If you don’t close a short options position on expiration, the option will expire ITM if the underlying price is above the strike price, meaning you will be obligated to buy or sell the underlying asset at the strike price (potentially resulting in a loss). If the option is OTM, it will simply expire worthless, and you will keep the premium you received when you sold the option.