This is the day an option or futures contract expires. In option trading, investors have the ability of purchasing options. When the purchase is complete, the option or futures contract gives investors the right to purchase or sell assets at a pre-determined price within a particular time.
This value is called the strike price. When it comes to call options, the strike price refers to the purchase of a security up to the expiration date. On the other hand, the strike price at which shares can be sold refers to put options.
Option Expiration or Expiration Date is set on the third Friday of the contract month when a futures contract expired. There is a probability that the third Friday may fall on a holiday.
As a result, the Option Expiration will be moved to the Thursday before the third Friday. It is important to note that once the options contract expires, the contract becomes invalid.
There are options that have automatic exercise provision. This type of option is automatically exercised in the money at the time of expiration.
Expiration Cycles
In Option Expiration, there are three cycles. The first cycle consists of the following months – January, April, July and October while the second cycle consists of the following months – February May, August and November. For the third cycle, March, June, September and December are included.
It is important to note that at any given cycle, four different expiration months are available. As a result, investors and traders are able to use options for short term hedging.
Modifications have been done to the cycles resulting in two near month expirations to be available for trading. For the next expiration months which are usually further out, they will still depend on the cycle for the underlying stock.
Tools that help you select the right Option Expiration
Greeks
This is a mathematical calculation formulated to measure the impact of volatility and expiration time. Two Greeks are available that help investors select optimal Option expiration. They include:
a. Delta
This value ranges between -1 to +1. It helps to measure options sensitivity for an underlying stock. For example, if the delta value is 0.60 for a particular options contract, for every $1 moved by an underlying stock, the result is a $0.60 move on the options price. It is important to note that the higher the probability of profitability, the more expensive the option will be.
b. Theta
This value helps to quantify the value lost on the option over a particular time (time decay). Theta can be a negative value for purchased puts and calls as well as a positive value for sold puts and calls.
Volatility
It is important to note that traders and investors rely on either implied or historical volatility when it comes to selection of expiration date. As the X factor in option pricing, Implied Volatility (IV) gives an investor the probability of how expensive or inexpensive an option is.
This is relative to other expiration dates. Since a higher IV indicates a higher options premium, it’s wise to consider a trade off.
For example on April, Company A call has a 30 day IV of 10, on May it has an IV of 30 while on June it has an IV of 70. If Company A was supposed to report its earnings on June, the company representatives will be asked to explain why the Implied Volatility is higher on June than other months.
Probability Calculator
The Probability Calculator is designed to provide accurate calculations as well as enable investors adjust the stock price target, Option Expiration and volatility parameters. The goal is to determine odds of an underlying stock before it attains a certain price.
Furthermore, it allows you to enter different Option Expiration to help calculate the probability of a successful trade. Thanks to the calculator, investors are able to improve their odds assuring them of trades ending up in the money.
Final Thoughts
What investors and traders need to note is that Option Expiration is a constraint for holders of long options but a benefit to short options position. That is why trading strategies like short straddle and short strangle depend on Options Expiration.
To ensure success during trading, you need to improve your trading strategy, consider upcoming earnings and liquidity. By monitoring your successful trades, you will learn at which range you found success in and which you did not.