Know Your Options on Expiration Day

In prior articles on options, the concept of “options expiration” was briefly touched upon. This article goes into greater depth on the concept of options expiration and how it impacts the use of the option.

An element of all option contracts is that the rights and obligations of an option contract are limited in duration and will EXPIRE at some point in the future.

The first reason to be aware of the fact the options have a limited life, comes from the fact that the option contract can expire or run out time before the stock moves as expected. An option contract will have no value if the stock price is below the call strike price at expiration. A put option contract will expire with no value if the stock price is above the strike price at expiration.

In the case of exchange traded stock options – which include the majority of options most widely traded - the month of the option series determines the month of expiration. The monthly expiration is the Saturday following the 3rd Friday of the month. An MSFT May 30 Put would expire on the 3rd Friday in May. A GE June 30 Call would expire on the 3rd Friday in June and so on and so forth.

As we saw in a prior article, the GOOG April 450 Call contract expired at the close of trading on the 3rd Friday in April. The earnings announcement was scheduled for the 3rd Thursday in April. If the announcement was delayed for some reason and the April option series was chosen, the options could have expired at the close of trading on Friday with no value and there would have been no opportunity to have benefited from the “Straddle” trade.

If an option is being chosen to benefit from an anticipated event, then the correct month must be chosen to make sure that the option does not expire before the event occurs.

Another reason to be aware of the expiration date relates to the events that occur at expiration. If an expiring option has intrinsic value at the close of trading on the 3rd Friday, the option holder can have the rights of the option carried out.

For example, an owner of a call option has the right to buy the stock at the strike price. If at expiration on the 3rd Friday, the stock price is above the call option’s strike price, the stock could be delivered to owner of the option on the following Monday. Normally the broker handling the options account will make sure that the option owner is aware of the possibility of this occurrence and will have the option owner sell the option before this occurs. But, it is still best to understand that this could occur.

In the case of a put option, which gives the owner of the put the right to sell the stock at the strike price, if the stock price is below the strike price at the close of trading on the 3rd Friday, then the option owner could be expected to deliver the stock to sell at the strike price on the following Monday. Again the broker handling the account will normally make sure that the option owner is aware of this possibility and will have the option owner sell the option before this occurs.

While the day of expiration is fixed for stock options, options used on other financial and commodity instruments can have different expiration days. It is important to know the expiration cycle on other types of financial or commodity instruments that might become a part of your trading arsenal before entering into a trade.

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