Expiration of an option
Key takeaways The expiration date is the specific date and time an options contract expires. An options buyer chooses the expiration date based primarily on 2 factors: cost and the length of the contract.
Volatility estimates, Greeks, and a probability calculator can help you make this decision.
By Chizoba Morah Updated Jul 30, A stock option gives the holder the right though not an obligation to buy or sell a stock at a specified price. The option can be exercised any time before expiry, regardless of whether the strike price has been reached. The relationship between an option's strike price and the market price of its underlying shares is a major determinant of the option's value.
Unlike stocks, exchange-traded funds ETFsor mutual funds, options have finite lives—ranging from a week Weeklys 1 to as expiration of an option as several years LEAPs. The farther out the expiration date, the more time you have for the trade to be profitable, but the more expensive the option will be.
Thus, figuring out the balance between price and time until the contract expires is a key to success when buying or selling options. Unpacking the expiration date When do options expire?
Monthly options expire on the third Friday of the expiration month. A note of caution: Trading near an option's expiration date can be more complex versus when there is more time to expiration2. Inexperienced traders should use caution.
But was the April expiration date the best choice for your strategy?
Mutual Funds and Mutual Fund Investing - Fidelity Investments
How do you decide which expiration date is right for your expiration of an option Just as you need to make a price forecast for an underlying stock before picking an option's strike price, so to do you need to make a forecast of how long it will likely take for your trade to become profitable before picking an option's expiration date. As always, start with your outlook. Then, determine which specific option would be the most appropriate.
Volatility Your assessment of volatility is one of the most important factors when selecting both your options strategy and the expiration date. Many options traders rely on implied volatility IV and historical volatility HV 3 options statistics to help them pick an expiration date.
Close Your Trade Before Expiration
Implied volatility, in particular, can be the X factor in options pricing. It can give you an idea of how expensive or inexpensive an option may be, relative to other expiration dates. Typically, the higher the IV, the more expensive the option. Furthermore, implied volatility tells you how cheap or expensive the premium is relative to past IV levels.
A higher IV indicates a higher options premium. This may sound like a benefit to an option seller.
Option Trade Entry: How Many Days to Expiration? - Options Trading Research
However, you need to consider the trade-off, which is perhaps that a higher-than-normal IV may be due to an upcoming announcement or earnings release that is causing the market to expect a large price move.
Thus, you need to weigh the cost against your expectation for the stock to move.
Volatility options statistics are available on Fidelity.