Expiration Date (Derivatives)

What is an 'Expiration Date (Derivatives)'

An expiration date in derivatives is the last day that an options or futures contract is valid. When investors buy options, the contracts gives them the right but not the obligation, to buy or sell the assets at a predetermined price, called a strike price, within a given time period, which is on or before the expiration date. If an investor chooses not to exercise that right, the option expires and becomes worthless, and the investor loses the money paid to buy it.

BREAKING DOWN 'Expiration Date (Derivatives)'

The expiration date for listed stock options in the United States is normally the third Friday of the contract month, which is the month when the contract expires. However, when that Friday falls on a holiday, the expiration date is on the Thursday immediately before the third Friday. Once an options or futures contract passes its expiration date, the contract is invalid. The last day to trade equity options is the Friday prior to expiry.

Some options have an automatic exercise provision. These options are automatically exercised if they are in-the-money at the time of expiry. The Options Clearing Corporation (OCC) automatically exercises a call or put option that is at least one cent in-the-money.

Expiration and Option Value

In general, the longer a stock has to expiration, the more time it has to reach its strike price, the price at which the option becomes valuable. In fact, time decay is represented by the word theta in option pricing theory. Theta is one of four Greek words used to reference the value drivers on derivatives. The other three 'Greeks' are delta, gamma and vega. All other things equal, the more time an option has until expiration, the more valuable it is.

There are two types of derivative products, calls and puts. Calls give the holder the right, but not the obligation, to buy a stock if it reaches a certain strike price by the expiration date. Puts give the holder the right, but not the obligation, to sell a stock if it reaches a certain strike price by the expiration date. This is why the expiration date is so important to options traders. The concept of time is at the heart of what gives options their value. After the put or call expires, it does not exist. In other words, once the derivative expires the investor does not retain any rights that go along with owning the call or put.

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