What Is an Option Term and Expiration Date?
Option terms and expiration dates go hand in hand. These aspects are unique to options and relate to the limited time span of the option contract.
An option expiration has unique implications for both buyers and sellers. Option Term The option term is the period during which an option is active.
During this term, the option changes in value based on fluctuations in the price of the stock it represents. The most important distinction to note regarding the option term is whether the option is American style or European style. American style options may be exercised at any time during the option term, while European options may only be exercised at the expiration date.
Expiration Date The expiration date is the date when the option term ends.
After the expiration date, the option is no longer active. When one option expires, trading switches over to the next options market.
Options Spreads What Is an Option? Options are financial instruments that are derivatives based on the value of underlying securities such as stocks. An options contract offers the buyer the opportunity to buy or sell—depending on the type of contract they hold—the underlying asset. Unlike futuresthe holder is not required to buy or sell the asset if they choose not to. Call options allow the holder to buy the asset at a stated price within a specific timeframe.
For example, after the March options on Coca Cola stock expires, trading switches over to Coca Cola's April options market. Note that investors may choose to trade options markets with distant expiration dates, but most trading takes place in the options market with the closest expiration date.
Related to option: stock optioncall optionput option Option Gives the buyer the right, but not the obligationto buy or sell an asset at a set price on or before a given date. Investorsnot companiesissue options. Buyers of call options bet that a stock will be worth more than the price set by the option the strike priceplus the price they pay for the option itself. Buyers of put options bet that the stock's price will drop below the price set by the option.
Implications Option expiration has different implications for buyers and sellers. For buyers, expiration is the last chance to exit the option position or exercise the option to buy the underlying the term of the option is.
- Which is easier to make and spend money
- The strike price may be set by reference to the spot price market price of the underlying security or commodity on the day an option is taken out, or it may be fixed at a discount or at a premium.
For sellers, expiration automatically closes out their position. After an option expires, the buyer no longer has the right to exercise the option and, therefore, the seller retains the premium and no longer has to worry about the risk of exercise.
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Time vs. The time value decreases gradually at first and then the rate of decay increases as the option term nears the expiration date.
At expiration, the time value reaches zero and the only value bitcoin symbol on the option is the intrinsic value derived from the underlying stock price. Writer Bio Adam Parker is a writer from Virginia.