A:

The use of options has increased dramatically over the years as a way to profit from or hedge against the volatile movements of stock prices. Not only can options be traded with stock as the underlying asset, they are also traded on foreign currency, interest rates and various indexes.

There are two kinds of stock options, American and European. American options can be exercised any time up to and including the expiration date of the option. However, European options can only be exercised on the date of expiration. Expiration dates follow three cycles, January, February and March. The January cycle is comprised of the first month of each quarter (January, April, July and October); the February cycle consists of the second month of each quarter (February, May, August and November); and the March cycle consists of the final month of each quarter (March, June, September and December).

Beyond the difference between American and European options, there are also more specific terms regarding expiration. Because expiration dates are usually identified just by a month, a specific date is identified within the expiration month that is used as an exact deadline. This deadline, for both types of options, is the Saturday following the third Friday of the expiration month. An investor normally has until 4:30pm Central time on the third Friday of the month to instruct his or her broker to exercise an option. The brokers then have until 10:59pm the following day to file the paperwork necessary to execute the trade.

To learn more about options, see the Options Basics Tutorial, The Four Advantages Of Options and Trading A Stock Versus Stock Options Parts I and Part II.

RELATED FAQS

  1. How does a forward contract differ from a call option?

    Find out more about forward contracts, call options, the mechanics of these financial instruments and the difference between ...
  2. What are the main risks associated with trading derivatives?

    Understand derivatives trading and learn about the primary risks usually associated with trading in the derivatives market, ...
  3. How can an investor profit from a fall in the utilities sector?

    Learn how an investor can profit from a fall in the utilities sector by employing speculation methods such as short selling ...
  4. What is the difference between derivatives and options?

    Learn how options are one type of derivative and how equity options derive their value from a stock, and understand other ...
RELATED TERMS
  1. Strike Width

    The difference between the strike price of an option and the ...
  2. Inverse Transaction

    A transaction that can cancel out a forward contract that has ...
  3. Reference Equity

    The underlying equity that an investor is seeking price movement ...
  4. Boundary Conditions

    The maximum and minimum values used to indicate where the price ...
  5. Delta-Gamma Hedging

    An options hedging strategy that combines a delta hedge and a ...
  6. Gamma Hedging

    An options hedging strategy designed to reduce or eliminate the ...

You May Also Like

Related Articles
  1. Investing Basics

    How To Create Capital Protected Investment ...

  2. Options & Futures

    How does a forward contract differ from ...

  3. Options & Futures

    Tesla Stock Too Expensive? Trade Tesla ...

  4. Options & Futures

    Stock Options To Trade On Intraday Momentum ...

  5. Mutual Funds & ETFs

    4 Ways You Can Invest In Gold Without ...

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!