Expiration Date

An expiration date may have different kinds of meaning. In most cases it means the last day when food or medicine may be eaten without any dangerous consequences for a person. In finance it refers to the date as well, however, it means the last day when derivative contracts may be exercised. Usually, the decision about the expiring position is made 1 or 2 days before the expiration date or right on the expiration date.

Before this date a holder of derivatives has three variants of how to be. First is to exercise the derivative, second is to close the position and either receive the profit or incur losses, the third is to expire it for nothing.

Exercising dates

There are different types of derivations, thus, the expiration date is different for each type. For example, in the U.S. the 3rd Friday (of the month that is contract or the month in which this contract expires) is the day of expiration. However, it may be applied only to the listed stock options. Moreover, in case it isn’t possible to trade on the 3rd Friday (it may be a holiday), then the expiration date is the Thursday before the scheduled Friday.

As soon as a contract’s expiration day is out of the sight, it means that the contract (an option or future) is considered invalid. Traders have to be extremely determined and quick-witted in order to make good and decent decisions regarding their contracts.

To facilitate in some ways the process of expiring, some options may be exercised automatically, it says, they are provided with an automatic exercise provision.

Another type of options, index options, have the same day of expiration as listed stock options (the 3rd Friday of the month). It’s usually the last day in which trading is allowed for American options. For European options, it’s slightly different, the last day in which trading is allowed is the day before the expiration date.

Option’s Expiration rules

In case an investor decides to purchase a stock, which has much time before the expiration date, thus, it will certainly have a great advantage. The greater the time of expiration, the greater time the stock has to get closer to the strike price. It means that the time value (also known as extrinsic value) becomes greater as well.

In this world two forms of options exist, the first one is known as a call option, the second one is called a put option. The call option provides its owner with a right to buy a stock in case it approaches the strike price, however, it can’t make the holder buy it. The put option is the reverse term, it means its owner obtains a right to sell a stock in case it approaches the strike price, however, it can’t make the holder sell it.

This is the reason why the traders are so engaged with the day derivatives expire. Time is an exceedingly important idea of all kinds of options. This is the main thing, which reflects their value. Thus, as soon as the expiration date passes, time value disappears. It means that after the expiration holders of puts and calls lose their rights to purchase or sell stocks outlined in the option.

Thus, options become null and void. It’s worth noticing that the last day when it’s possible to trade options isn’t the same day when the options expire.

Future’s Expiration rules

Options may be similar to futures, but not the same. The main difference between them is that even after expiration futures don’t lose their value. In case the representation of the contract is something real and actual, such as some products, the future’ holder has a strong intention to purchase the product or to sell this product. Since the product can’t just disappear as well as the intention, the contract won’t expire for nothing and parties will be eager to succeed in fulfilling the contract. In case the intention has eventually changed, the holder has the right to close the positions the day before the expiration date.

This day before the expiration is widely known as the "final trading day". In order to realize money that the future’s owners earned or lost they are obligated to close it on this day or before the expiration date. There are, however, other choices. For instance, the holder may require his or her broker to purchase the underlying asset, which is the representation, or sell it. The way described in the previous sentences is quite the usual way of dealing with futures for businesses. Retail traders usually choose another way. For example, traders may “roll” the positions. In other words, it’s closing of the trade of which a trader works at the moment and opening this trade in a contract with an expiration date that is far.