Options expiration: a comprehensive guide
Options expiration is crucial for traders to understand. This guide explores expiration types, what happens when options expire and how to select the best expiry date for your strategy.
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Options expiration date: definition and types
In the world of trading and investing, ‘expiration’ refers to the finite lifespan of certain financial instruments. For options, futures and options on futures, the expiration (or expiry) date marks the end of the contract's validity. At this point, the contract is either exercised or becomes worthless.
Understanding expiration is crucial if you’re an options trader, as it affects both pricing and strategic decisions. Let’s explore the five main types of options expiration:
1. Regular monthly expiration
Regular monthly expiration is the standard expiration cycle for listed stock options. Expiration typically occurs on the third Friday of the contract month at 9pm (UK time). If that Friday is a holiday, expiration moves to the previous day (ie Thursday).
Monthly options, often called ‘monthlies’, are generally available from one to 11 months out. They provide a balance between time value and strategic flexibility.
2. Weekly expiration
Weekly options offer shorter-term trading opportunities. Expiration ranges between one and five weeks. These options are similar to their monthly counterparts, except for their shorter lifespans, and can be useful for trading short-term market movements or specific events.
Weekly options are typically introduced each Thursday and expire eight days later on Friday at 9pm (UK time). Some assets may have up to five consecutive weekly expirations if they don’t coincide with a monthly expiration.
3. Long-term equity anticipation securities (LEAPS)
LEAPS are generally options with expiration dates of one year or more. They provide extended exposure to an underlying asset’s price movements, which makes them popular among traders or investors with longer-term outlooks or those seeking to hedge long-term positions.
LEAPS expire on the third Friday of the contract expiration month at 9pm (UK time), or the day before that (ie Thursday) if the Friday is a holiday.
4. Zero days to expiration (0DTE)
Zero-days-to-expiration options are contracts traded on their expiration day. These short-lived options have become increasingly popular among day traders and short-term speculators.
0DTE options experience rapid time decay and can be highly volatile. Their prices often fluctuate dramatically in response to small movements in the underlying asset. Due to the short lifespan of these options, their premiums are typically lower than those of longer-dated contracts. Traders use 0DTE options for capturing intraday moves, hedging short-term risk or speculating on specific events. However, they carry high risk and require careful management.
5. Quarterly expiration
Quarterly expiration options, often referred to as 'quarterlies', are contracts that expire at the end of each calendar quarter. These options typically expire on the last trading day of March, June, September or December. Quarterly options bridge the gap between short-term monthly options and longer-term LEAPS.
Quarterlies offer traders and investors a medium-term time frame for their strategies. They provide more time value than monthlies but with lower premiums than LEAPS. This makes them useful for position trades lasting several months or for hedging quarterly earnings reports.
Choosing the best options expiry date for your strategy
Consider these factors when choosing your options expiry:
- Trading strategy: weekly expiries may, for example, pair well with short-term strategies, while time frames like those offered by LEAPS might suit longer-term outlooks
- Time decay: options lose value as they approach expiration, with this effect accelerating as the time left until expiry decreases
- Volatility expectations: how rapidly you believe volatility will expand or contract could influence your choice of expiry
- Liquidity: ensure sufficient trading volume for easy entry and exit
- Cost: longer-dated options generally cost more due to extended time value
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What happens when options expire?
At expiration, an option's fate depends on whether it's in the money (ITM) or out of the money (OTM).
ITM options have intrinsic or real value and are automatically exercised at expiration. For stock options, this means you'll buy or sell 100 shares of the underlying stock at the strike price. For cash-settled products like index options, you’ll get the cash equivalent of the option's intrinsic value.
OTM options expire worthless and disappear from your account.
Put options are OTM if their strike price is below the stock price, and ITM if their strike price is above the stock price. The opposite applies for call options. ITM stock options are typically converted to 100 shares of the underlying stock (long or short).
You can submit a do-not-exercise (DNE) request if you don’t want to exercise an ITM option.
What happens when a spread expires partially in the money?
Certain options strategies involve different legs (ie trading a combination of options in a single position). Together, these legs make up what’s known as a spread.
You should be cautious with spreads near expiration, especially those close to the current stock price. If only one leg of the spread expires ITM, it can result in unexpected stock positions. In high-priced stocks, a narrow spread can become 100 shares worth of buying power and risk. To avoid this, consider closing spread positions before expiration if they're near the money.
FAQs
How long do options take to expire?
Options expiration periods vary:
- 0DTE options are contracts traded on their expiration day
- Weekly options expire eight days after introduction, typically on Fridays
- Monthly options expire on the third Friday of the contract month
- Quarterly options are contracts that expire at the end of each calendar quarter
- LEAPS generally expire a year or more from issuance, on the third Friday of the expiration month
All options typically expire at 9pm (UK time) on their expiration date. If the expiration falls on a holiday, it moves to the previous day.
At what time do options expire?
Options typically expire at the close of trading, which is 9pm (UK time). Always verify the exact expiration date and time for each specific contract before entering a position.
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