Expiration dates on options contracts are the last day the holder has the right to buy or sell the underlying asset at a certain strike price, basically, the final day that a contract can be exercised. Expiration dates can directly impact the value of an option contract—options with longer expiration dates have higher premiums and those with less time have lower premiums. The closer a contract gets to its expiration date, the more value it will lose because there’s less time to turn a profit.
Understanding expiration dates can impact your strategy and risk management maneuver when trading options, so we’ve put together this helpful guide that will teach you everything you need to know about options expiration dates and how they’ll ultimately impact your online trading experience.
What Is an Options Expiration Date?
The expiration date on an option contract is the final date that an option contract can be exercised. It’s the last day the holder has the right to buy or sell the underlying asset at the specified strike price. Beyond the option’s expiration date, the contract becomes worthless if it’s not exercised.
Expiration dates vary by contract type. Weekly options have seven days, monthly options have around 30 days, and LEAPS option contracts can cover anywhere from one to three years. These distinct expiration periods are based on the nature of the agreement and the industry involved.
The expiration time depends on the types of options contract:
- Dailies: Expires at the end of the business day.
- Weeklies: Expires at the end of the trading week.
- Monthly: Expires on the third Friday of the contract month at 3 PM (CST).
- Quarterlies: Expires at the end of a financial quarter.
- LEAPS Contracts: Expires up to one, two, or three years after they are issued.
- Zero-Day: This expires within one trading day and is often used for short-term speculating.
How Options Expiration Dates Work
The expiration date of an options contract is a critical factor in determining the contract’s value, and it can influence trading strategies based on time decay and rapid price fluctuation potential as the expiration date gets closer.
Time value is the primary impact of the expiration date. Time value is the portion of the premium that is tied to the remaining time left until expiration. Time value diminishes when the contract gets closer to expiration. The diminishing time value eventually leads to a decrease in the option’s overall price due to less time for investors to turn a profit with the position.
Now, we get to “in-the-money” and “out-of-the-money.” These are the assignment rules that all options reach, but it depends on where the stock price is in relationship to the strike price:
- In-the-Money (ITM): The underlying asset price is above the strike price for a call option or below for a put option. Options that end up in the money can be exercised to lock in a profit.
- Out-of-the-Money (OTM): This refers to the option expiring as worthless and the option holder loses the premium they paid for the contract.
What happens if an option is not exercised or closed before expiration? Simply put, the contract becomes null and void. The option expires as worthless, which means that the option holder loses their premium and they lose any obligation to buy or sell the underlying asset.
Expiration Cycles and Available Expiration Dates
The typical timeframe for options to expire is referred to as the “standard monthly expiration cycle,” which falls on the third Friday of the month. In the US market, this is considered the most common practice for most individual traders and investors.
- Weekly Options: These contracts expire every Friday, which means that all weekly contracts have an expiration date that falls on Friday. It’s different from monthly options where those fall on only the third Friday of the month. New weekly options are posted on Thursdays.
- Quarterly Options: These contracts expire on the last business day of each calendar quarter. Specifically, they expire in March, June, September, and December. These contracts are the middle ground between short-term contracts like weekly, daily, or monthly contracts and the longer-term LEAPS.
- LEAPS (Long-Term Equity Anticipation Securities) Contracts: These typically expire in January (the expiration date falls on the third Friday of the January expiration month) and the length of the contract can range anywhere from one to three years. LEAPS are American-style options, which means that traders can exercise the contract at any time before the expiration date.
The Effect of Expiration on Options Pricing
The expiration dates of option contracts can have a considerable impact on the contract’s intrinsic and extrinsic values:
- Intrinsic Value: The immediate profit an option holds gains if they exercise the option immediately. It’s the difference between the current market price for the underlying asset and the option’s strike price.
Expiration dates can impact intrinsic value by causing it to decrease as the expiration date gets closer. There’s less time for the underlying asset price to move more favorably as the contract gets closer to the expiration date, which reduces the option’s overall value.
- Extrinsic Value: The differences between an option’s market price and its intrinsic value. You can also refer to it as the option’s time value.
The expiration date can also impact extrinsic value by causing it to decrease as the expiration date gets closer (time decay). Options hold less extrinsic value as it gets closer to the expiration date because there’s less time for it to become profitable.
The Role of Implied Volatility (IV) and Theta Decay
Implied volatility plays a big role in determining the overall option price as the contract nears its expiration date. At the same time, theta decay rapidly accelerates. When IV is high, the price of the option is usually higher because the market is expecting a larger price swing in the underlying asset. This will lead to a larger theta decay.
Options premiums decrease as expiration approaches, except in high volatility scenarios, where the underlying asset’s price can move significantly enough to make the contract profitable.
Real-World Example
Let’s take a look at a hypothetical example of an option’s price movement leading up to expiration.
You purchase a stock that’s currently trading at $40 with a strike price of $45. The expiration date of the contract is one month away. Due to time decay, the option price will gradually decline as it gets closer to the expiration date. This happens even if the underlying stock price remains stable. The contract becomes less valuable because there’s less time for the stock price to reach the strike price.
Key Dates and Expiration Schedules
To find the expiration dates for options on stocks, ETFs, and indices, check the option chain on your brokerage app or trading platform. Each contract clearly displays the expiration date (remember that the date will vary based on the type of contract like a weekly, quarterly, or monthly).
Resources for Checking Expiration Calendars
You can check out the expiration dates on your option contracts using your brokerage or investment app of choice. You can even use platforms like CBOE Global Markets to do the same thing, just using an exchange instead of your website or mobile app.
Expiration Dates for Index Options
For most index options, the expiration date is on the third Friday of the month, that is if your options contract is a monthly one. Trading will typically stop on the previous afternoon, and these index options are typically cash-settled. The holder receives the difference between the strike price and the index value at expiration (not the underlying stocks).
Expiration Date for Stock/ETF Options
For the monthly option standards, stocks and ETFs have expiration dates that fall on the third Friday of the month. Weekly options expire every Friday. In the event of a holiday falling on a Friday, weekly options will expire on the preceding Thursday.
Trading Strategies Based on Expiration Dates
The use of margin in investment is something of a complicated subject, not because the word has a number of different meanings and can be used differently depending on what form of investment you are making. This often leads to confusion among investors, particularly relatively inexperienced ones, and people often misunderstand what margin means in options trading.
You can read more about this particular subject on the following page: Margin.
Options Tables & Options Chains
Check out the best moves trading options based on the expiration date of the contract you’re currently holding:
- Short-term Traders: Using weekly options for quick trades.
- Swing Traders: Leveraging monthly expiration dates for broader trends.
- Long-term Investors: Using LEAPS for long-dated options exposure.
- Theta Strategies: Selling options (covered calls, cash-secured puts, credit spreads) to benefit from time decay as expiration nears.
Risks and Considerations of Expiring Options
There are many risks to holding options until their expiration date, including the following:
- Limited Potential Upside: Holding the option until expiration may limit potential profits compared to selling it earlier when the time value is still relatively high.
- Time Decay: The natural decline in the option’s value over time. It speeds up as the expiration date gets closer.
- Losing Your Premium: When contracts expire out-of-the-money, the investor loses the amount that they paid to enter the trade.
Any trader who is holding a short option position needs to understand the risk of early assignment, which occurs when the trader is forced to buy and sell the stock when it’s exercised by the long option holder. This can apply to cash or margin accounts.
Some contracts can be more difficult to trade due to the liquidity issues these contracts usually experience near expiration. A lot of it has to do with the fact that, most of the time, option contracts lose a lot of their value as they get close to the expiration date.
Frequently Asked Questions
Find out what our readers and customers have been asking about option contracts and their expiration dates. We took the most popular questions, answered them, and included them in this section so you can get the key highlights and points covered in this guide.
What happens if I don’t close my options contract before expiration?
If you don’t close your options contract before it expires, the contract will either be exercised automatically or it will expire as worthless. If the option is in-the-money, it will go to automatic exercise where the holder will buy or sell the underlying asset at the strike price. Options expiring as worthless are considered out-of-the-money.
How does expiration affect my options profits and losses?
Expiration dates have a significant impact on your potential profits and losses, which is caused by time decay, where the contract loses value significantly as it gets closer to its expiration date. The longer you hold the option, the more value it has. The less time you have means that there’s less time to turn a good profit.
When do options stop trading on expiration day?
Options stop trading on the expiration date at 3 PM CST, but some exchange-traded fund options might trade until 3:15 PM CST. The times for option trading on expiration dates are set up by Options Clearing Corporation.
What are after-hours risks for expiring options?
After-hours risks for expiring options include the potential for significant price fluctuations in the underlying security, which can move options from out-of-the-money to in-the-money.
How do brokers handle the automatic exercise of in-the-money options?
The same entity which sets up the times for expiration dates on option contracts, the Options Clearing Corporation, will automatically exercise any expiring options that close $0.01 in-the-money or more on the expiration date.
Keep The Expiration Date in Mind
Tracking expiration dates in trading strategies is key for investors to figure out how they will impact the value of an option contract. Options with longer expiration dates have higher premiums, and those with less time have lower premiums. The closer a contract gets to its expiration date, the more value it will lose because there’s less time to turn a profit.
Stay informed and use proper risk management. Check out our options trading strategies guide for more insights.