Life of an option
December 22 You may also choose alternative options that expire on a weekly, monthly, or quarterly cycle. These are reserved for underlying stocks with the most sustained options activity.
The rules for closing trades and expiration are the same, regardless of the cycle you choose. This is also referred to as a short position. Conversely, a long position or holding owning the obligation is created when buying the contract without a subsequent short position.
In short, long contracts are the opposite of life of an option contracts.
Fairly intuitive. Opportunities for buying an option cannot exist unless an obligation to sell or purchase that same stock is created by the writer. This can only be created when the same contract is written by some contra-party. This brings us to a very important concept — open interest.
What is Open Interest? An important measure of options activity and liquidity is open interest.
Option time value
Open interest is a term that simply means the unexpired contracts that are listed on an exchange that has not been exercised against or closed prior to their expiration. This differs from volume, as volume is a reference to the number of contracts trading hands over a given time period e. These trades can be both opening and closing transaction.
What does open interest tell us? The higher the open interest for an option, the more buyers and sellers there are in the marketplace.
Buy for others
This usually equates to a tighter spread between the price you pay for the option ask and the price you sell an option at bidwhich saves you money and allows you to quickly take action in both opening and closing positions. A low open interest indicates a lower interest in the contract, making it less liquid with a wider bid-ask spread.
A wide bid-ask life of an option can cost you lots of money and headaches.
How Open Interest is Decreased through Closing Positions Closing open options positions prior to expiration reduces the open interest. Closing positions can happen in one of two ways: a closing buy and a closing sale.
This transaction is allowed at any time during the life of the options contract, up to and including the date of expiration.
It is important to remember that this takes place before exercise because if you are exercised against, you no longer control your fate. This is more critical for sellers or short positions than it is for holders since, as was discussed previously, a writer has an obligation to perform some duty relative to the contract buy or deliver the underlying stock while the holder has the right but not the obligation to do anything.
The Life Of An Options Contract
The OCC is the largest equity options clearing organization in the world and is dedicated to financial integrity and bringing stability to the options markets. The OCC, in addition to providing the risk disclosure document required at account opening, maintains the efficiency of the market by exercising open positions prior to expiration also see below.
Open Trading robots experts Contracts at Expiration Contracts that are still open those that have not been closed or exercised at expiration face one of two fates: expiration or exercise. The execution fate is one more reason why the options market is one of the most efficient financial life of an option in the world. Important to note that due to the random assignment and the ITM rule, it is possible that some of the legs of your spread will be exercised while the other legs expire without life of an option action.
Options at expiration that are at-the money the strike price is the same as the market price of the underlying stock or out-of-the-money strike price is below the market price of the stock will not be automatically exercised by the OCC or the broker.
If the holder takes no action, the option will expire worthless.
This is good news for the seller who did not close their position prior to expiration because it allows them to keep the premium received for selling the option. Conclusion Consider this information the basic working knowledge every options trader needs to understand before trading commences.
This information is readily provided when you open an op tions account and is contained in a document that is titled, Characteristics and Risks of Standardized Options, first published by the OCC in It's a bit of a long read, but all traders should review it. The document is called the risk disclosure document that must be given to every new account holder when opening an options trading account before the first trade takes place and must be provided periodically typically on an annual basis by way of mail or electronic delivery to existing options account holders.
Hopefully, this information serves as a good refresher for you. So trade with confidence knowing that you fully understand all the eventualities of your trades.