The Basics of Option Expiration — Global Trading Software

Expiration Date Basics for Options

Options are common in the world trading assets such as stocks. They are basically contracts that give the holder the ability to buy or sell an asset. However, this buying or selling needs to be at a specified price and within a specific period of time.

So, option expiration is the date on which the option contract expires and becomes invalid. In this article, we’ll take a closer look at the stock option expiration time. Then, we’ll also discuss what your choices are before and after expiration.

All of this will help you develop the best strategy when it comes to dealing with an option expiration date.

What’s an option expiration date?

As mentioned earlier, an option is a contract to buy or sell an asset within a specific time period. After, the option contract expires and becomes invalid. The expiration date for options is typically the third Friday of the month in which the option contract expires.

For example, let’s say an option contract has an expiration date of March 17, 2023. It means that the option contract will expire on the third Friday of March, 2023.

Remember to read the contract carefully and take note of the expiration date. This will ensure that you don’t miss out on a potentially profitable trade.

What’s likely to happen when options expire?

When options expire, there are a few different things that can happen, depending on the circumstances. Here are some possible outcomes for consideration when it comes to developing an expiry day option strategy:

  1. Exercising the option: If the holder chooses to buy or sell the underlying asset, they will need to do so by the expiration date. The option will be settled on the settlement date (typically one business day after the expiration date) at the agreed-upon price.
  2. Not exercising the option: If the option holder doesn’t buy or sell the asset by the expiration date, the option will expire and become invalid. The holder won’t have the right to buy or sell the underlying asset, and the contract will have no value.
  3. Selling or re-assigning the option: Option holders also have the ability to sell their options or have them assigned to another party before the expiration date. It’s transferred to the new owner, and the original option holder has no rights under the option contract.

What choices does the option holder have before option expiration?

There are a few different choices available for consideration. Below, we explore the most likely outcomes:

  1. Exercise the option: The option holder can buy or sell the underlying asset at the agreed-upon price. This will most likely be the case if the asset’s current market price is favorable compared to the option’s strike price.
  2. Sell the option: There’s also the option to sell the options to another party before the option expiration time. This can be a good choice if the holder doesn’t want the option, or believes that the option won’t be exercised.
  3. Hold the option: Sometimes, the holder believes that the market price of the underlying asset will move in their favor before the expiration date. They, thus, may choose to hold onto the option and see if it becomes more valuable.
  4. Let the option expire: If the holder doesn’t believe that the option will be profitable for them, they may choose to let the option expire.

What happens after the options expiration date and time arrives?

Once the stock options expiration time arrives, the holder can no longer buy or sell the underlying asset. However, it’s important to take note of the price of the underlying asset at this time. Is the underlying asset’s price, at the time of the option expiration date, above or below the stake price?

The stock exchange will automatically exercise the option if it’s In The Money (i.e., will make a profit). This simplifies trading for everyone by assuming that the option buyer wants to exercise In The Money options. There’s no risk for the option buyer if they forget to exercise the option or are unable to do so.

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