What is 'Expiration Time'

The expiration time for an options contract is the time of day when the contract is no longer valid. It is more specific than the expiration date and is not the same thing as the last time to trade the option.

The Nasdaq offers a more detailed definition: "The expiration time is the time of day by which all exercise notices must be received on the expiration date. Technically, the expiration time is currently 11:59 am Eastern time on the expiration date, but public holders of option contracts must indicate their desire to exercise no later than 5:30 pm on the business day which precedes the expiration date."

BREAKING DOWN 'Expiration Time'

Understanding the expiration time starts with understanding the expiration date.

An expiration date in derivatives is the last day that an options or futures contract is valid. When investors buy options, the contracts give them the right, but not the obligation, to buy or sell the assets at a predetermined price. This price is the strike price. The exercising of the option must be within a given 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.

The expiration date for listed stock options in the United States is usually 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 the expiration date, the contract is invalid. The last day to trade equity options is the Friday before expiry.

Since many public holders of options deal with brokers, they face different expiration times. The last day to trade an option is the third Friday of the expiration month, but the actual expiration time is not until the next day (Saturday). A public holder of an option usually must declare their notice to exercise by 5:00 p.m. (or 5:30 p.m. according to Nasdaq) on Friday. This timeframe will allow the broker to notify the exchange of the holders intent by the actual expiration time on the expiration date. Furthermore, notification limits depend on the exchange where the product trades. For example, the Chicago Board Options Exchange (CBOE) limits trading on expiring options to 3:00 p.m. Eastern on the last trading day.

Caveats at Expiration

While the majority of options never reach their expiration dates due to traders offsetting or closing their positions before that time, some options do live on until their actual expiration times. This delay can create interesting dynamics because the last time for trading can be before the expiration time. This time difference is not a problem when the underlying security also closes for trading at the same time.

However, if the underlying security does trade beyond the close of trading for the option, both buyers and sellers might find that the exercise of their contract is automatic if they were in the money. Conversely, they may expect the automatic exercise, but after-hours trading (AHT) in the underlying asset may push them out of the money.

Rules covering these possibilities, especially at what time the final price of the underlying is recorded, can change. So, traders should check with both the exchange where their options trade, as well as the brokerage handling their account.

RELATED TERMS
  1. Automatic Exercise

    Automatic exercise is a procedure where the Option Clearing Corporation ...
  2. Front Month

    Front month refers to the futures contract in each market with ...
  3. Call Over

    A call over is when the buyer of a call option exercises the ...
  4. Interest Rate Options

    An interest rate option is a financial derivative allowing the ...
  5. Far Option

    The far option in a spread trade is the option with the longer ...
  6. Early Exercise

    Early exercise is the process of buying or selling shares under ...
Related Articles
  1. Trading

    Options Strategies for Your Portfolio to Make Money Regularly

    Discover the option-writing strategies that can deliver consistent income, including the use of put options instead of limit orders, and maximizing premiums.
  2. Trading

    Should an Investor Hold or Exercise an Option?

    There are times when a trader or investor shouldn't exercise an option. Find out when to hold and why you shouldn't exercise an option.
  3. Trading

    Beginner's Guide To Call Buying

    This article focuses on the technique of buying calls and then selling or exercising them for a profit. Learn how to buy calls today.
  4. Trading

    The Basics of Options Profitability

    Learn the various ways traders make money with options, and how it works.
  5. Trading

    5 Popular Derivatives And How They Work

    These popular derivative instruments allow investors to hedge, speculate or increase leverage but weigh the risks before taking exposure.
  6. Trading

    Option trading strategies: A guide for beginners

    Options offer alternative strategies for investors to profit from trading underlying securities. Learn about the four basic option strategies for beginners.
RELATED FAQS
  1. Can an Option be Exercised on the Expiration Date?

    American options can be exercised up to and including the expiration date but European options can only be exercised on the ... Read Answer >>
  2. 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 >>
  3. Why do options with the same underlying stock and strike prices trade for different ...

    You would think that two options with the same underlying stock and strike prices would trade at the same price, but interestingly ... Read Answer >>
  4. What is the difference between options and futures?

    An option gives a buyer the right, but not the obligation to buy or sell an asset, A futures contract obligates the buyer ... Read Answer >>
Trading Center