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What is an 'expiration date' in reference to option trading?

What is an 'expiration date' in reference to option trading?

An ‘expiration date’ refers to the time when an option contract must either be acted upon by the owner (buying or selling the security in question) or left to expire.

With derivatives such as options and futures, there will be an expiry, or expiration date in the contract, after which they expire worthlessly. Most options contracts will expire in 3, 6 or 9 months from when they are generated, and they all share the same expiration day of the month on their contracts in the United States, which is the 3rd Friday of the month at 4 PM.

The Thursday immediately before that Friday is used if there is a holiday. Most brokers are going to want the orders to be in before 4, but there are circumstances where you can make your intentions known to your broker and have them execute for you after 4 if the rest of the market influences whether your options are in or out of the money, since the rest of the market will still be trading until 5 and the options market doesn’t technically settle until mid-Saturday.

American-style options can be exercised at any date before the expiration. As options approach the expiration date, their inherent time value decreases and it becomes harder in most cases to trade them if that is your intention. Similarly, futures contracts have expiration dates and often expire unused.

Keywords: trading, derivatives, Futures, expiry, expiration date, options, holidays,