Hey everyone.
This is Kirk here again, back at optionalpha.com.
And in this video, I’m going to go over option expiration.
What is option expiration?
You hear about it all the time and simply going back to our RB’s combo coupon example,
it is the last day to close or exercise your options contract.
That’s what it means.
Just like anything else, it expires, it runs out, the time is done, it’s the last day.
It’s the option expiration day that you have the last chance to do something with
your contract.
Now typically, you’re going to enter positions with different expiration months in varying
dates, but it’s always important to know when that expiration date is.
Now again, in this example with our RB’s roast beef combo because I love RB’s, you
may not be able to see it in this particular video, but you can see right down here that
the expiration date is 4/30/2009, so this is an old coupon obviously.
But you can see that this coupon expires on April 30th.
Just like an options contract, the coupon is very similar.
You have the choice to buy this RB’s roast beef combo for 399 before April 30th and that’s
just like an expiration day.
If you had an option, you have the choice to buy stock in Apple for example before the
April expiration date, whenever that is.
It’s the same type of mentality and thinking that goes into a coupon as with an option.
Hopefully that makes it a little bit simpler for everything.
Another Apple stock example: What I did here is take a chart of Apple just recently and
I cut it off and then I drew all these vertical green lines.
These green lines represent the expiration dates for Apple contracts in the future, so
they can be varying dates for expiration.
This green line right here where my cursor is, is the November expiration, the next one
is December and the next one is January.
Really, you want to consider these the make-it-or-break-it points.
If you buy an option contract for December expiration which is this middle green line
here, then that's the point at which either the underlying stock is going to move far
enough for you to make a profit or it’s not and you’re going to have to make a decision
whether you want to get rid of that contract or whether you want to exercise it, whatever
the case may be.
Now, remember that you can actually get rid of your options contract by reversing the
order.
And we've gone over those in different video tutorials.
But you can reverse the order for that options contract and get rid of it before expiration.
You don’t necessarily have to wait until expiration to make a decision.
As always, with our membership, we have the expiration calendar that’s right inside
of our membership area.
It’s always updated.
In fact, we have it always out for the next three years.
In case you’re trading some of those longer term options, you know exactly when those
dates are.
But this calendar is really helpful because it always gives the holiday periods which
are in orange, the options stop trading day which is the Friday before expiration and
then the expiration day for options and also quarterly expiration which isn’t on this
particular cutoff for the graph, but is on the other ones.
Some expiration day and expiration in general tips: Expiration day for equity and index
options is the Saturday immediately following the third Friday of the expiration month.
If you go back here, you can see that the Saturday is the options expiration day and
it’s following the third Friday of every month.
In February 1, 2, 3, there’s the third Friday, expiration is that Saturday.
For American style index option contracts, the last trading day is generally the third
Friday of expiration month unless that day is an exchange holiday in which case, the
last trading day will be the previous day or Thursday.
This is a really important one to watch out for.
For instance, if Christmas or Thanksgiving or something is on the third Friday or it
just happens to be a holiday on that third Friday, then it’s actually going to move
to the previous day.
You just want to be aware of that as you’re always trading.
Know when expiration is, so you don’t get caught on your heels.
Continuing on here with your expiration tips: For European style index options…
And we’ve covered the differences between those two in other video tutorials more in
depth, but we’ll touch on it here as well.
But for European style index option contracts, the last trading day will be the business
day, generally Thursday, preceding the day on which exercise settlement value is calculated.
I know that’s a lot, but keep rereading it.
For an American style index option, they can exercise these any time prior to expiration.
Now, the keyword here is “exercise.”
That means you’re actually going to convert the option from an option to the physical
underlying stock or ETF or whatever the case is.
That’s the keyword.
Most people get confused in saying that American style versus European that you can’t close
out of your trade until expiration.
That's not the case.
You can always reverse your trade and sell it back to the market or buy it back from
the market.
The key here between American and European is that you cannot exercise Europeans until
a specific time prior to expiration.
With American style options which is generally what we trade here, these can be exercised
at any time prior to expiration.
If your expiration is 30 days away, you can right now convert it to stock and buy that
stock.
Again, a European style index option may only be exercised during a specific period of time
prior to expiration.
Now generally, this is the last Friday prior to expiration day.
That’s the last Friday prior to that Saturday when they actually expire.
As always, I hope you guys enjoyed this video.
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