Options Expiration | When Do Options Expire?
Unlike shares of stock, options cannot be held forever. An option's expiration date represents the final day that the option can be traded before settling to its final value. Standard options that are in-the-money (ITM) at expiration will expire to long or short shares of stock, or cash if the options are cash-settled. Options that are out-of-the-money (OTM) at expiration will expire worthless.
The following table summarizes what standard equity options settle to at expiration:
Option Type | Long / Short | ITM / OTM? | Option Settlement |
---|---|---|---|
Call | Long | ITM | +100 Shares of Stock |
Short | ITM | -100 Shares of Stock | |
Put | Long | ITM | -100 Shares of Stock |
Short | ITM | +100 Shares of Stock | |
Call or Put | Long or Short | OTM | $0 (Worthless) |
After each option's expiration date, the option can no longer be traded. From a trader's perspective, expiring options will seamlessly disappear from the account, replaced by the corresponding stock position if the option expires in-the-money.
Now that you know the various outcomes for equity options at expiration, let's discuss the specific days that options expire.
When Do Options Expire?
Equity options have standard and non-standard expiration dates that are available to market participants.
Standard options expiration occurs on the third Friday of each month. As a result, the last day to trade options in the standard monthly cycles is the third Friday of each month, which will be between the 15th and 21st day of the month. If the third Friday of the month falls on a market holiday, then the final day to trade the standard monthly options will be Thursday of that same week.
Any expiration date that isn't on the third Friday of the month is considered to be non-standard, which includes weekly and quarterly expiration cycles. Weekly expiration cycles typically expire every Friday, except during the weeks of quarterly expirations.
The following table summarizes the various expiration types you'll encounter when trading equity options:
Expiration Type | Last Day to Trade | Standard or Non-Standard |
---|---|---|
Monthly | Third Friday of Each Month | Standard |
Weekly | Every Friday, Except Quarterly Expiration Weeks | Non-Standard |
Quarterly | Last Trading Day of March, June, September, and December | Non-Standard |
What's the Longest-Term Options Expiration Date?
As an options trader, you'll always be able to choose from expiration cycles of varying durations. The shortest-term expiration cycle will, of course, be 0 days (expiring that same day), while the longest-term expiration cycle will typically be approximately two years away.
As an example, here were all of the available expiration cycles for Apple Inc. (AAPL) options as of December 9th, 2016:
Expiration Date | Days to Expiration | Monthly or Weekly |
---|---|---|
December 9th, 2016 | 0 | Weekly (Non-Standard) |
December 16th, 2016 | 7 | Monthly (Standard) |
December 23rd, 2016 | 14 | Weekly (Non-Standard) |
December 30th, 2016 | 21 | Weekly (Non-Standard) |
January 6th, 2017 | 28 | Weekly (Non-Standard) |
January 13th, 2017 | 35 | Weekly (Non-Standard) |
January 20th, 2017 | 42 | Monthly (Standard) |
January 27th, 2017 | 49 | Weekly (Non-Standard) |
February 17th, 2017 | 70 | Monthly (Standard) |
March 17th, 2017 | 98 | Monthly (Standard) |
April 21st, 2017 | 133 | Monthly (Standard) |
June 16th, 2017 | 189 | Monthly (Standard) |
July 21st, 2017 | 224 | Monthly (Standard) |
November 17th, 2017 | 343 | Monthly (Standard) |
January 19th, 2018 | 406 | Monthly (Standard) |
January 18th, 2019 | 770 | Monthly (Standard) |
As you can see, there are 16 listed expiration cycles. You may notice that the weekly cycles are more present in the near-term, while the longer-term cycles are primarily monthlies. Longer-term expirations will typically consist of standard monthlies because weeklies aren't listed until a few weeks before their expiration dates.
Alright, so you know what an option's expiration date is, but how do you choose which one to trade in? In the next section, we'll discuss how you can go about choosing an options expiration cycle to trade.
How to Choose an Option Expiration Cycle
With so many available expiration cycles, how do you decide which one to use? When choosing an expiration cycle to trade, there are two factors to consider:
1) The options strategy you plan on trading
2) The amount of trading activity in the expiration cycle you're considering (gauged by volume and open interest)
Let's run through each of these considerations one-by-one.
Consider Your Strategy
Most of the time, options expiration cycles with less than 100 days to expiration will be used because most options traders have short-term predictions for the stock price or implied volatility.
Additionally, traders who primarily sell options may prefer staying in near-term expiration cycles because short premium strategies profit from time decay, which is virtually non-existent in longer-term options.
Conversely, traders who primarily buy options may also prefer shorter-term expiration cycles because short-term option premiums are less expensive and more responsive to changes in the stock price.
Then who trades long-term options? Well, a common way to utilize longer-term expiration cycles is by purchasing deep-in-the-money calls or puts to replicate long or short stock positions. By purchasing long-term, deep-in-the-money calls or puts, traders can minimize losses from the decay of an option's extrinsic value while gaining exposure to shares of stock with a lower margin requirement (more leverage).
Consider Liquidity / Trading Activity
The second consideration, and perhaps the most important one, is the amount of trading activity in the expiration cycle. Trading activity can be gauged by option volume and open interest for a particular stock. You'll learn about volume and open interest in-depth in one of the following guides, but for now all you need to know is that more volume and open interest is a good thing.
As mentioned previously, most traders prefer to trade short-term expiration cycles, which means the most option volume and open interest will be in the near-term cycles. Additionally, standard monthly expiration cycles will typically have far more volume and open interest than weekly cycles.
To validate this, we compared the open interest and volume in each of AAPL's expiration cycles from the table in the previous section. Here were the results:
As we can see, the highest open interest values are in the standard monthly cycles. Additionally, the first two standard options expirations have significantly more open interest than any of the longer-term cycles (with the exception of the 406-day expiration).
What about the amount of option volume? Let's take a look:
In this case, the weekly cycle with 0 days to expiration (expiring that same day) had the most option volume, which makes sense because many traders adjust or close their positions on the day of expiration. Considering only standard options expirations, we can see that the first two monthly cycles have by far the most volume.
So, what does it all mean? Well, trading the two nearest standard monthly expirations benefits traders in terms of entering and exiting positions fluidly. However, if your strategy is built for longer-term or weekly expiration cycles, then of course you'll have to use those.