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Expiration of options what is it. Expiration Day Mistakes to Avoid with Options | Finance - Zacks

Forward and futures contracts Video transcript Let's explore a bit how the price of an option can vary, or how it can relate to the additional quick earnings expiration date.

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  • Learn how and when to remove this template message In finance, the expiration date of an option contract represented by Greek letter tau is the last date on which the holder of the option may exercise it according to its terms.

So what I'm going to do is compare two similar options with the underlying stock being General Electric. And they're going to be the same in every way, except one is going to have a further out expiration date.

On or before this day, investors will have already decided what to do with their expiring position. Key Takeaways Expiration date for derivatives is the final date on which the derivative is valid.

So let's compare this call option right here. And it has an April, expiration.

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So it's going to expire, or the last day of trading that you could trade this option, will be the third Friday in April. Let's compare that with an option that has the same strike price, but has a December, expiration.

And you can see right when you compare the options that the one that has a further out expiration cost more.

The profit and loss of an option position at expiration is a function of the original premium and the difference in price between the futures contract and the strike price of the option. To understand the profit and loss, we look at the math for each of these potential scenarios. This is the price at which you are obligated to sell the futures contract if you are assigned.

And the reason why it costs more is because you get to retain the option for longer. Let me draw a hypothetical stock chart.

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And so you could imagine, let's say, that you have both of those options. Or you have the option to have either one of those options. And let's say that the stock does something like that.

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Well, it's going to be in the money. So you would make money.

Key takeaways The expiration date is the specific date and time an options contract expires. An options buyer chooses the expiration date based primarily on 2 factors: cost and the length of the contract. Volatility estimates, Greeks, and a probability calculator can help you make this decision.

But if you have the expiration of options what is it with a closer expiration, with the April, expiration, you have to exercise the option right now.

You would have to exercise it right now and close out the option.

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If you had the longer dated option, you could do it. You could do the exact same thing that this owner of an April, option has.

Options Expiration Calendar 2021

Or you can hold the option and maybe see if the stock continues to go up. Or you could imagine a downside scenario.

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Maybe the stock does something like this, where it goes out of the money. Someone who holds the closer dated option, the one that expires first, they'll be completely out of the money. The option would be worthless on this date.

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But if you have the longer expiration, if your option does not expire until December ofthen you could hold it. And maybe, maybe the stock will do something nice.

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There's some probability that it will one day become in the money. I want to make it clear.

Options: Picking the right expiration date

Even if you have this situation here, and you hold the longer dated option-- you have the option that's going to expire in December-- you still would not want to exercise it. Because there is someone who would still enjoy all of this optionality of the future.

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So what you're better off doing, instead of exercising the option, you're better off selling the longer dated option right over there. And you should be able to capture at least as much profit as you would from exercising the option, plus capturing whatever value the buyer sees in the future optionality.

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