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.

  1. When holding an option through expiration date, are you automatically paid any profits, ...

    Holding an option through the expiration date without selling does not automatically guarantee you profits, but it might ... Read Answer >>
  2. How do I change my strike price once the trade has been placed already?

    Learn how the strike prices for call and put options work, and understand how different types of options can be exercised ... Read Answer >>
  3. How can derivatives be used to earn income?

    Learn how option selling strategies can be used to collect premium amounts as income, and understand how selling covered ... Read Answer >>
  4. How are call options priced?

    Learn how aspects of an underlying security such as stock price and potential for fluctuations in that price, affect the ... Read Answer >>
  5. Does the seller (the writer) of an option determine the details of the option contract?

    The quick answer is yes and no. It all depends on where the option is traded. An option contract is an agreement between ... Read Answer >>
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