When Do Options Expire: Key Dates You Can’t Ignore

Options contracts, those mighty tools of financial leverage, have specific expiration times you need to know. Options technically expire at 11:59 a.m. on the date of expiration. But for the average Joe, the latest you can exercise your options is by 5:30 p.m. on the same day. This little nugget of information can make or break your trading strategy.

Let’s keep it simple: Options can expire in the morning (A.M.) or the afternoon (P.M.). Most expire when the market closes, marking them as P.M. options. Imagine planning your day around these tiny yet crucial windows. Missing them just because you didn’t check the clock? Amateur hour.

If you’re trading options on futures, things get a bit messier. Futures options mostly expire at the market’s close too, but you still have to be aware of these A.M. and P.M. differences. Get it wrong, and you might as well toss your money into the sea. Be smart, time it right, and use this expiration knowledge to your advantage.

The Basics of Option Expiry

Options have specific dates when they expire. Knowing these dates can make or break your trading strategy. Let’s break down what you need to know.

Definition of Option Expiry

Option expiry is the date when the option contract becomes worthless. It’s the last day you can trade that option. After this date, if you haven’t taken action, you’re out of luck. For example, if you bought a call option on Apple stock, your right to buy Apple at the strike price ends on the expiry date.

Most options expire on the third Friday of the expiration month, but this can vary. For instance, weekly options expire every Friday, and quarterly ones at the end of each month quarter. If expiration falls on a holiday, expiration moves to the previous trading day.

Types of Options

Options come in two main flavors: calls and puts. Both have their quirks.

  1. Call Options: These give you the right to buy the underlying asset at a set price (strike price). If you think the price will go up, you buy a call option.

  2. Put Options: These give you the right to sell the asset at a set price. If you’re betting the price will drop, the smart move is to buy puts.

In-the-money options (where the strike price is favorable compared to the current market price) will usually be exercised at expiry. Out-of-the-money options (where the strike price is not favorable) expire worthless. So, timing and underlying price movement are crucial.

Expiration and Exercise

Let’s break down what happens when options expire and when they’re exercised. Understanding these details is key for options trading.

Intrinsic vs. Time Value

Options have two types of value: intrinsic value and time value.

Intrinsic value is the part of the option’s price that represents the real value if exercised today. This means, for a call option, the intrinsic value is the difference between the underlying asset’s current price and the option’s strike price. For a put option, it’s the other way around.

Time value is what you pay for the possibility that the option might make you money between now and expiration. As you get closer to expiration, this time value diminishes. It’s called time decay. If you’re holding an option that’s expiring soon, time is not on your side!

Automatic Exercise

An important point to know is about automatic exercise. If an option is in-the-money (ITM) at expiration, brokers usually automatically exercise it. This means if you have a call option with a strike price below the current stock price, or a put option with a strike price above it, your option will get exercised.

Of course, this assumes you’ve got the buying/selling power in your account to handle the transaction. If you’re out of cash or margin, sorry, pal—you’re out of luck! And by the way, if you’ve got a penny option that’s ITM, don’t get greedy thinking it won’t be exercised. It will, and you might end up with stocks you didn’t budget for.

Options Expiry Date and Time

Expiration dates are straightforward—every option has one. Most options expire on the third Friday of the month. But here’s the kicker: it actually ends at the close of trading on that day.

The final trading hour is crucial because the option’s expiry time—when all must be done—is 4:00 PM Eastern Time. Miss that, and it’s game over for your position.

In Chicago Time (CT), that’s 3:30 PM. So, be sharp on timing. No one wants to fumble at the goal line, least of all with money on the move.

In short, stay aware of intrinsic and time value, know what will (pretty much) certainly get exercised automatically, and always watch the clock on expiry day.

Expiration Cycles

Expiration cycles are crucial for options trading. They determine when options contracts expire and therefore when they need to be either exercised or let go.

Standard Expiration Cycles

The standard expiration cycle for options sees contracts expiring on the third Friday of the expiration month. Don’t forget, trading stops at the end of that day, but the option officially expires the next day, Saturday.

Here’s a quick rundown of how this works:

  • January contracts expire on the third Friday in January.
  • At the same time, February becomes the current month and March the next month.

So, by the end of January, you have options available for February, March, April, and July. Drawn in cycles, they follow alphabetical order for simplicity. For example, February, May, August, and November are always paired together. It’s systematic, predictable, but absolutely not devoid of complexities.

Quarterly and Monthly Cycles

Options aren’t confined to single months. Financial markets love spice, so we got quarterly and monthly expiration cycles too.

In the quarterly cycles, contracts expire at the end of each calendar quarter—March, June, September, and December. These are picked because many companies report earnings based on quarters.

Monthly cycles are a bit more dynamic. They can include the current month plus following months. This means, every month, there’s always a series of options contracts readily available for the following months.

Think of it like this: If an option starts trading in January, by the time February rolls around, the March option becomes the current month’s option. These cycles keep the market vibrant and always give you something to look forward to.

Trading Strategies Towards Expiry

It’s the wild west when options are close to expiration. Time decay hits hard, but it’s the best time for some strategic moves. Let’s break down the ways you can make the most out of your trades as expiration day nears.

Maximizing Profits Prior to Expiry

To rack up profits, timing is everything. One hot technique is selling options just before they expire. This takes advantage of theta decay, which is the rate at which the option loses value as expiry approaches. The closer it gets, the faster it loses value – think of it like an ice cube melting in the sun.

Example: If you sell an option at $5 with only a week to go, you might bank the full premium if it finishes out of the money (OTM). That’s $500 per contract right into your pocket.

Another tactic is to use lotto options. It’s a thrill ride – high risk but juicy reward. Buy cheap, out-of-the-money (OTM) options close to expiry. If the underlying stock moves significantly, those pennies turn into dollars.

Risk Management Approaches

Let’s not kid ourselves; risk management is crucial, especially in the high-stakes game of options nearing expiry. Stop-loss orders are essential. They automatically sell your option if its price drops to a certain level, cutting your losses.

Pro Tip: Hedging with vertical spreads can save your neck. Buy one option and sell another with the same expiry but a different strike price. This limits both your risk and your potential profit, balancing your exposure.

Use position sizing to manage how much skin you have in the game. Don’t throw all your chips on a single bet. Diversify across different expiries and strike prices.

Take advantage of historical volatility (HV) and implied volatility (IV). Study these metrics to understand market expectations and price swings, so that you can plan your moves smartly.

With these strategies, you’re set to navigate the choppy waters of options trading as expiration looms.

Market Behavior Around Expiry

Stock prices can move in unexpected ways as options expire. The market sees higher volatility, and option writers face specific risks tied to stock prices.

Volatility Patterns

As options approach their expiration date, volatility tends to spike. This surge happens because traders rush to either close or roll over their positions. Implied volatility—the market’s forecast of a likely movement in stock prices—often increases. Even if nothing significant is happening in the market, this time-driven pressure stirs things up.

Take a look at this:

  • Increased trading volume: Many traders fighting to grab the best prices.
  • Unpredictable price swings: Prices can dance around wildly.
  • Time decay: Options lose value faster, which adds to the craziness.

The term “gamma,” measures how sensitive an option’s delta is to price changes in the underlying asset. When expiry nears, gamma rises, leading to larger swings in the option’s price.

Pin Risk and Option Writers

Pin risk is another nuisance for option writers. Here’s the crux: as expiration looms, stock prices often cluster around the strike price of heavily traded options. This phenomenon is called pinning.

Why does it matter? If the stock price sticks too close to the strike price, option writers face tough choices. They might need to:

  • Hedge positions: Scramble to balance their portfolios.
  • Exercise or let expire: Decide whether to take actual stock delivery or let the option expire worthless.

Option writers want to avoid surprises at expiry. Pinned stocks can cause unexpected assignments. If the stock dances around the strike price, the decision to exercise might come down to the last trading hour, risking sudden exercises that force them to buy or sell at unfavorable prices.

Understanding these nuances helps traders anticipate the playbook around expiry dates. Stay smart, and manage your risks wisely.

Impact of Expiry on Option Pricing

Options nearing expiration can wreak havoc on your portfolio if you’re not careful. As the expiry date closes in, two factors become critical: the theta decay and the gamma risk. These can make or break your trades.

Theta Decay Curve

Theta measures how much an option’s price decreases as time passes. That’s time decay – the closer we get to expiration, the faster your option loses value.

Imagine you’re holding a melting ice cream cone. The longer you hold it, the more it melts away, just like your option premium.

Most of the decay happens in the last 30 days before the expiry. During this period, the theta decay curve becomes steeper. For instance, if an option loses $0.10 per day 60 days out, it might lose $0.30 per day when it’s down to 10 days.

Trading options with high theta decay can be both a blessing and a curse. If selling, you might profit from the fast decay, but if buying, you constantly fight against this ticking clock.

Gamma Risk Near Expiry

Now, let’s talk gamma. Gamma measures how much the delta of an option changes as the underlying stock price changes. Delta tells you how much the price of an option changes with a $1 move in the underlying.

Near expiration, gamma becomes extremely high. This means small moves in the stock’s price can lead to big changes in the option’s delta.

When gamma is high, your positions become ultra-sensitive to underlying price movements.

For example, if a stock is trading near the strike price, even a minor move can flip an out-of-the-money call to in-the-money or vice versa fast. This volatility can be tough to manage and can lead to significant losses if you’re on the wrong side of the move.

Managing gamma risk near expiry requires a keen eye and quick reflexes. If you’re not paying attention, things can go south real quick.

Use this info to sharpen your trading game. Timely actions and understanding these metrics can mean the difference between profit and loss.

Options Expiry Calendars

Options expiry calendars are essential for tracking when different contracts expire across various exchanges. Each calendar provides details on specific dates, trading events, and product information.

Exchange Calendars for Expiry

MarketWatch Options Expiration Calendar:
MarketWatch offers a handy tool that allows users to view options expiration dates. This is great for planning trades and avoiding surprises. They provide the expiration dates per month, making it accessible to keep track of your options.

CME Group Expiration Calendar:
The CME Group has a more detailed and interactive calendar. It provides information on pricing, open interest, settlements, and volatility. You can filter by the product name, trading event, and asset class. This calendar helps traders make informed decisions with comprehensive data.

Options Trading IQ Calendar:
Options Trading IQ offers a long-term perspective with calendars for several years, including historical expiration dates. This helps traders see patterns and plan ahead. They provide details from 2020 to 2024, making it easy to track changes over the years. It is ideal for those who want to strategize for future trades.

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