What is an 'Expiration Date (Derivatives)'

An expiration date in derivatives is the last day that a derivative, such as options or futures, is valid. On or before this day investors will have already had to decide what to do which their expiring position.

Before an option expires, those that own the option can choose to exercise the option, close the position to realize their profit or loss, or let the contract expire worthless.

Futures traders holding the expiring contract must close it on or before expiration, often called the "final trading day," to realize their profit or loss. Alternatively, they can hold the contract and ask their broker to buy/sell the underlying asset that the contract represents. Retails traders don't typically do this, but business do, such as an oil producer using futures contracts to sell their oil. Futures traders can also "roll" their position. This is a closing of their current trade, and an immediate reinstitution of the trade in a contract that is further out from expiry. 

Breaking Down 'Expiration Date (Derivatives)'

Expiration dates, and what they represent, vary based on the derivative being traded.

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. Therefore, traders must decide what to do with their options by this last trading day.

[ Expiration dates are important to consider when trading futures or options contracts, but there are many other dynamics that are equally important. For example, an option's theta tells you the rate of decline in the value of an option as it approaches the expiration date, which may be more important than knowing the date itself. If you're new to options trading, Investopedia's Options or Beginners Course will show you everything you need to get started, with over five hours of on-demand video, exercises, and interactive content. ]

Some options have an automatic exercise provision. These options are automatically exercised if they are in the money (OTM) at the time of expiry. If a trader doesn't want to be exercised, they must close out or roll the position by the last trading day.

Index options also expire on the third Friday of the month, and this is also the last trading day for American style index options. For European style index options, the last trading is typically the day before expiration.

Expiration and Option Value

In general, the longer a stock has to expiration, the more time it has to reach its strike price and thus the more time value it has.

There are two types of options, 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, time value 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.

Expiration and Futures Value

Futures are different than options in that even an out of the money futures contract (losing position) holds value after expiry. For example, an oil contract represents barrels of oil. If a trader holds that contract until expiry, it is because they either want to buy (they bought the contract) or sell (they sold the contract) the oil that the contract represents. Therefore, the futures contract does not expire worthless, and the parties involved are liable to each other to fulfill their end of the contract. Those that don't want to liable to fulfill contract must roll or close their positions on or before the last trading day.

RELATED TERMS
  1. Expiration Time

    The expiration time of an options contract is the date and time ...
  2. Front Month

    Front month refers to the futures contract in each market with ...
  3. Serial Option

    A serial option is a short-term option on a futures contract ...
  4. Options On Futures

    An option on futures gives the holder the right, but not the ...
  5. Put Calendar

    An option strategy: -Buy one put option contract with 90 days ...
  6. American Option

    An American option is an option that can be exercised anytime ...
Related Articles
  1. Trading

    Getting acquainted with options trading

    Learn about trading stock options, including some basic options trading terminology.
  2. Trading

    Give Yourself More Options With Weekly and Quarterly Options

    Weekly and quarterly options were introduced to give a greater choice of option expirations to investors, and enable them to trade more efficiently.
  3. 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.
  4. Investing

    3 Reasons to Use ETF Options Over Futures (SPY, QQQ)

    Learn about exchange-traded fund (ETF) options and index futures, and why it might be a better decision to use ETF options instead of futures.
  5. Trading

    The Difference Between Options and Futures

    Learn the differences between options and futures, including the risks associated with each.
  6. Trading

    Beginner's Guide To Call Buying

    Learn how to buy calls and then sell or exercise them to earn a profit.
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. 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 >>
Hot Definitions
  1. Business Cycle

    The business cycle describes the rise and fall in production output of goods and services in an economy. Business cycles ...
  2. Futures Contract

    An agreement to buy or sell the underlying commodity or asset at a specific price at a future date.
  3. Yield Curve

    A yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but ...
  4. Portfolio

    A portfolio is a grouping of financial assets such as stocks, bonds and cash equivalents, also their mutual, exchange-traded ...
  5. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  6. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
Trading Center