The date in which options or futures contracts expire
Over 1.8 million professionals use CFI to learn accounting, financial analysis, modeling and more. Start with a free account to explore 20+ always-free courses and hundreds of finance templates and cheat sheets.
What is the Expiration Date?
The expiration date, in derivatives trading, refers to the date in which options or futures contracts expire. In other words, the expiration date is the last day that a derivative contract is valid. On the date of expiration, the derivative contract is settled between the buyer and seller.
What are Derivatives?
A derivative is a contract between two parties and whose value is derived from the performance of an underlying asset (e.g., stocks, commodities, bonds, indexes, currency, etc.). Derivatives are commonly used for hedging (reducing risk) or speculation. The three main types of derivatives are (1) forwards and futures, (2) options, and (3) swaps. An example of a derivative follows:
ABC Company operates a farm and is a large consumer of soybean (which is subject to volatile price movements). The company enters into an option contract with a farmer to purchase 100 bushels of soybeans at a strike price of $900 on the expiration date of January 19, 2025. If the price of 100 bushels of soybeans exceed $900, ABC Company can exercise the option to purchase 100 bushels of soybeans at the strike price of $900.
Expiration Dates for Options Contracts
The expiration date varies depending on the type of derivative being traded. In the United States, the date of expiration for listed stock options is the third Friday of the contract month. For example:
- Stock options expiring January 2020 have an expiration date on Friday, January 17;
- Stock options expiring February 2020 have an expiration date on Friday, February 21; and
- Stock options expiring March 2020 have an expiration date on Friday, March 20.
Expiration Date and Option Value
Regardless of whether you are buying a put or call option, options with a longer expiration date have a higher time value. The longer the expiration date, the more time an option has to reach its strike price and the higher the time value of the option. Consider two options:
- A May 2020 Call Option (“Call Option 1”) on ABC Stock with a Strike Price of $10
- A September 2020 Call Option (“Call Option 2”) on ABC Stock with a Strike Price of $10
Currently, shares of ABC Company trades at a price of $7. The expiration dates of Call Option 1 and Call Option 2 are shown below:
Since Call Option 2 has a later expiration date, the time value of Call Option 2 is greater. Therefore, Call Option 2 would be valued at a higher option price than Call Option 1.
Options and Futures Nearing the Expiration Date
For American options, the owner can choose to exercise the option on any date up to the expiration date. If the owner of the option does not exercise the option (i.e., if the option is out-of-the-money) on the date of its expiration, the option expires worthless.
For European options, the owner can only exercise the option on the expiration date. If the owner of the option does not exercise the option (i.e., if the option is out-of-the-money) on the date of expiration, the option expires worthless.
For futures contracts, they must be closed on or before the date of their expiration. Alternatively, the contract owner can hold the contract and fulfill the contract by buying/selling the underlying asset of which the contract represents.
Comprehensive Trading & Investing eBook
From capital markets to trading and technical analysis strategies, CFI's 115-page Trading & Investing eBook covers all the major topics a world-class analyst needs to know!
Additional Resources
To keep learning and developing your knowledge of financial analysis, we highly recommend the additional resources below:
FAQs
The expiration date, in derivatives trading, refers to the date in which options or futures contracts expire. In other words, the expiration date is the last day that a derivative contract is valid. On the date of expiration, the derivative contract is settled between the buyer and seller.
What is the expiration date on options? ›
Each option has an expiration date, which is when the contract expires and ceases to exist. Strike price. Each option also has a strike price, and if the contract is exercised, the underlying security is bought and sold at the strike price of the option.
What happens if I don't sell my options on expiry? ›
Options Contracts
As such, if the contract is not acted upon within the expiry date, it simply expires. The premium that you paid to buy the option is forfeited by the seller.
What happens to options on expiry day? ›
Once an option reaches its expiration date, it either gets exercised if it is ITM or expires worthless if it is ATM or OTM. There are no provisions for extending the expiration date for these types of options.
What happens if I don't sell futures on expiry? ›
Futures contracts need to be settled before the expiration date to avoid penalties. However, there is no penalty on not settling an options contract before the expiration. You can simply let the contract expire if you wish not to buy or sell the asset.
What happens if you sell an option before expiration date? ›
The buyer can also sell the options contract to another option buyer at any time before the expiration date, at the prevailing market price of the contract. If the price of the underlying security remains relatively unchanged or declines, then the value of the option will decline as it nears its expiration date.
What happens if I let an option expire? ›
When options expire, any in-the-money options are typically exercised automatically, meaning the holder will buy (for calls) or sell (for puts) the underlying asset at the strike price. Out-of-the-money options expire worthless, resulting in the holder losing the premium paid.
Do options automatically sell when they expire? ›
If an option expires in-the-money, it will be automatically converted into long or short shares of stock in the associated underlying. If an option expires out-of-the-money, it therefore expires worthless, and it disappears from the account.
Is it better to let options expire worthless? ›
The decision you make will be influenced by the situation in question. Ideally, you'd be in the money before the expiration date and exercise the option. However, if that isn't the case, you can either sell the contract or let it expire worthless.
What happens if I forgot to square off options on expiry? ›
If an options contract position is not squared off before the expiration date, the trader can lose the total premium and any taxes and brokerage charges paid. You can utilize leverage to make purchases or sales during the trading day with an intraday (MIS/CO) order (up to 5 times the money in your account).
Assuming you have sold a call option and you find no buyers, this can happen in below cases: Your strike has become deep In The Money. And hence, if you are not able to square off the position, you option will be squared off automatically at expiry and you will incur a loss. You strike has become deep Out of The Money.
Can I hold my option till expiry? ›
If you're not able to square-off the position by expiry day and if it is ITM (In the money), it will be settled by the exchange. While if the option is OTM (Out of the money) it will expire worthless.
Which options become zero on expiry? ›
Eventually, the time value in case of all the 3 options will eventually tend towards zero as expiry approaches. While the OTM option and the ATM option itself will have a zero value, in case of ITM options the option premium will still be positive due to the existence of intrinsic value.
What happens if option price goes to zero? ›
Option value is zero so the premium paid is the loss incurred. Option value is zero so the premium paid is the loss incurred.
How are options settled on the expiry date? ›
Exercising an option happens in two ways - voluntary or automatic. When the option holder decides to exercise the option upon expiry, it is a voluntary exercise. If the option is in-the-money, it will be automatically exercised. All option contracts in India can only be exercised at expiry.
Can futures expire worthless? ›
If the market doesn't move in the direction you anticipated, the option may expire worthless, resulting in a total loss of the premium paid.
Is it better to buy options with longer expiration date? ›
Key takeaways
Unlike stocks, exchange-traded funds (ETFs), or mutual funds, options have finite lives—ranging from a week (Weeklys1) to as long 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.
Why do options expire after 10 years? ›
The 10-year deadline is required by the Internal Revenue Code. It's actually a five-year deadline to grant an incentive stock option to someone who's a 10% stockholder. For non-qualified stock options, 10 years is not required by the Internal Revenue Code, but it's almost universally the maximum term that you see.
How long should you hold an option? ›
So, how long should you hold an option trade? Well, it depends on your strategy and your risk tolerance. But if you're looking for a more conservative approach, you might want to consider holding your options for at least 100 days for long positions and 50 days for short positions.
