What options expiry times available

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Expiration Time

What is Expiration Time?

The expiration time of an options contract is the date and time when it is rendered null and void. It is more specific than the expiration date and should not be confused with the last time to trade that option.

Key Takeaways

  • The expiration time of an options contract is the date and time when it is rendered null and void.
  • Typically, the last day to trade an option is the third Friday of the expiration month, but the actual expiration time is not until the next day (Saturday).

Understanding Expiration Time

Expiration time differs from the expiration date in that the former is when the option actually expires while the latter is the deadline for the holder of the option to make their intentions known. Most option traders need only be concerned with the expiration date but it is useful to know the expiration time as well.

The NASDAQ offers a more detailed definition: “The expiration time is the time of day by which all exercise notices must be received on the expiration date. Technically, the expiration time is currently 11:59 am Eastern time on the expiration date, but public holders of option contracts must indicate their desire to exercise no later than 5:30 pm on the business day which precedes the expiration date.”

Since many public holders of options deal with brokers, they face different expiration times. Typically, the last day to trade an option is the third Friday of the expiration month, but the actual expiration time is not until the next day (Saturday). A public holder of an option usually must declare their notice to exercise by 5:00 p.m. (or 5:30 p.m. according to NASDAQ) on Friday. This time-frame will allow the broker to notify the exchange of the holders intent by the actual expiration time on the expiration date. Furthermore, notification limits depend on the exchange where the product trades. For example, the Chicago Board Options Exchange (CBOE) limits trading on expiring options to 3:00 p.m. Eastern on the last trading day.

An expiration date in derivatives is the last day that an options or futures contract is valid. When investors buy options, the contracts give them the right, but not the obligation, to buy or sell the assets at a predetermined price. This price is the strike price. The exercising of the option must be within a given period, which is on or before the expiration date. If an investor chooses not to exercise that right, the option expires and becomes worthless, and the investor loses the money paid to buy it.

The expiration date for listed stock options in the United States is usually the third Friday of the contract month, which is the month when the contract expires. However, when that Friday falls on a holiday, the expiration date is on the Thursday immediately before the third Friday. Once an options or futures contract passes the expiration date, the contract is invalid. The last day to trade equity options is the Friday before expiry.

Caveats at Expiration

While the majority of options never reach their expiration dates due to traders offsetting or closing their positions before that time, some options do live on until their actual expiration times. This delay can create interesting dynamics because the last time for trading can be before the expiration time. This time difference is not a problem when the underlying security also closes for trading at the same time.

However, if the underlying security does trade beyond the close of trading for the option, both buyers and sellers might find that the exercise of their contract is automatic if they were in the money. Conversely, they may expect the automatic exercise, but after-hours trading in the underlying asset may push them out of the money.

Rules covering these possibilities, especially at what time the final price of the underlying is recorded, can change. So, traders should check with both the exchange where their options trade, as well as the brokerage handling their account.

Expiration Date (Derivatives)

What Is an Expiration Date? (Derivatives)

An expiration date in derivatives is the last day that derivative contracts, such as options or futures, are valid. On or before this day, investors will have already decided what to do with their expiring position.

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Before an option expires, its owners can choose to exercise the option, close the position to realize their profit or loss, or let the contract expire worthless.

Key Takeaways

  • Expiration date for derivatives is the final date on which the derivative is valid. After that time, the contract has expired.
  • Depending on the type of derivative, the expiration date can result in different outcomes.
  • Option owners can choose to exercise the option (and realize profits or losses) or let it expire worthless.
  • Futures contract owners can choose to roll over the contract to a future date or close their position and take delivery of the asset or commodity.

Basics of Expiration Dates

Expiration dates, and what they represent, vary based on the derivative being traded. The expiration date for listed stock options in the United States is normally the third Friday of the contract month or the month that the contract expires. On months that the Friday falls on a holiday, the expiration date is on the Thursday immediately before the third Friday. Once an options or futures contract passes its expiration date, the contract is invalid. The last day to trade equity options is the Friday prior to expiry. Therefore, traders must decide what to do with their options by this last trading day.

Some options have an automatic exercise provision. These options are automatically exercised if they are in the money (OTM) at the time of expiry. If a trader doesn’t want the option to be exercised, they must close out or roll the position by the last trading day.

Index options also expire on the third Friday of the month, and this is also the last trading day for American style index options. For European style index options, the last trading is typically the day before expiration.

Expiration and Option Value

In general, the longer a stock has to expiration, the more time it has to reach its strike price and thus the more time value it has.

There are two types of options, calls and puts. Calls give the holder the right, but not the obligation, to buy a stock if it reaches a certain strike price by the expiration date. Puts give the holder the right, but not the obligation, to sell a stock if it reaches a certain strike price by the expiration date.

This is why the expiration date is so important to options traders. The concept of time is at the heart of what gives options their value. After the put or call expires, time value does not exist. In other words, once the derivative expires the investor does not retain any rights that go along with owning the call or put.

Important

The expiration time of an options contract is the date and time when it is rendered null and void. It is more specific than the expiration date and should not be confused with the last time to trade that option.

Expiration and Futures Value

Futures are different than options in that even an out of the money futures contract (losing position) holds value after expiry. For example, an oil contract represents barrels of oil. If a trader holds that contract until expiry, it is because they either want to buy (they bought the contract) or sell (they sold the contract) the oil that the contract represents. Therefore, the futures contract does not expire worthless, and the parties involved are liable to each other to fulfill their end of the contract. Those that don’t want to liable to fulfill contract must roll or close their positions on or before the last trading day.

Futures traders holding the expiring contract must close it on or before expiration, often called the “final trading day,” to realize their profit or loss. Alternatively, they can hold the contract and ask their broker to buy/sell the underlying asset that the contract represents. Retail traders don’t typically do this, but businesses do. For example, an oil producer using futures contracts to sell oil can choose to sell their tanker. Futures traders can also “roll” their position. This is a closing of their current trade, and an immediate reinstitution of the trade in a contract that is further out from expiry.

Options Don’t Expire on Fridays

If you think options expire on the third Friday of every month, you’d better read this

A reader recently asked about how after market trading affects options on expiration Friday since technically options expire at 11:59 p.m. on the following Saturday.

The reader wrote: “Some strategies call for allowing ITM options to be exercised and, for others, expecting their ITM options to expire worthless, thus allowing them to keep the premium, find out on Monday that after hours trading drove the options OTM. I am constantly reading up on options, and I find it misleading when people say options expire on Friday, ignoring what can happen to your position after hours.

“I found out the hard way when I was new to options and puts I had bought on SNDK expired OTM — or so I thought — only to wake up Monday morning to a margin call from my broker. I made money in the end because the stock was tanking, but had the stock reversed the following Monday I would have been in trouble! I also noticed that many times for certain stocks that get pinned, the pinning action continues after market.”

There are many moving parts here, so let’s dig in.

Options expire at 4 p.m. on the third Friday of the month in the sense that they no longer trade. But the stocks themselves keep trading after hours, so, as this reader notes, what’s in-the-money (ITM) at 4 p.m. on Friday can be out-of-the-money (OTM) by 5 p.m., or vice versa.

ITM options will automatically exercise based on the 4 p.m. closing price. The definition of ITM has changed over the years, and will also vary depending on your status and the policies of your clearing firm.

A “professional,” like a market maker, for example, may now automatically exercise options if they are as little as a penny ITM. A “customer” may only auto-exercise if the options are a nickel or dime ITM.

But automatic does not mean obligatory. You can always contact your clearing firm with an “exception.” An exception may take the form of exercising an option that closed OTM at 4 p.m.

Say, for example, XYZ closed at $49.90, and you own expiring calls with a strike price of $50. You may still exercise them, i.e., buy stock at $50.

Why would you do that?

Well suppose that it’s 4:30 p.m., and XYZ is trading at $50.50. You should exercise your calls, and then sell your $50 stock out for a 50-cent profit.

You do not, however, have unlimited time to exercise those options. The reader is correct to state that options technically don’t expire until noon on Saturday. That’s because options don’t “settle” until then as expiration-related D.K.s (i.e., Don’t Knows, or trades where the two sides don’t agree on what they traded) resolve. But, by rule, you must contact your clearing firm with an exception by 5:30 p.m. on Friday.

Does this window get abused? That is, do people somehow exercise options after 5:30 p.m. on expiration Friday and before they settle on Saturday?

Yes. I heard a horror story in ViroPharma Inc. (VPHM) a few years back, where bullish news came out on Sunday, yet someone was prescient enough to exercise OTM calls that opened ITM by Monday.

The moral of the story is, if you have at-the-money (ATM) options still open at 4 p.m. by option expiration Friday, follow the after-hours trading.

When in doubt, contact your clearing firm and make your intentions clear so as to avoid margin problems.

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