Options Expiration: All You Need to Know

In the trading and investments industry, the term "expiration" refers to the fact that certain trading instruments exist for a finite period of time.

For example, options, futures, and futures options only exist through their expiration date, after which these contracts are invalid. The term “expiration date” refers to the calendar date and time in which a trading instrument stops trading (i.e. “expires”), and all contracts are exercised or become worthless.

That means when evaluating a potential options position, most investors and traders consider not only price, but also time until expiration. Time until expiration may also be referred to as “days-to-expiration,” or DTE.

Due to the varying expiration details of different products, it's critical that investors and traders be aware of the exact date and time that a given product will expire before deploying a new position.

In the equity options universe, investors and traders can choose from three different types of option contracts—weeklies, monthlies, and longer-term options known as Long-Term Equity Anticipation Securities (LEAPS). The primary difference between these three contracts is the time until expiration, often referenced as "days-to-expiration" (DTE). Some very active products like SPX and SPY even offer multiple expirations within the same week!

The term “regular monthly expiration” (aka “monthlies'') refers to the standard expiration cycle of listed stocks options in the United States. The expiration date for listed monthly stock options in the United States is normally the third Friday of the contract month at 3:00 p.m. Central Standard Time (CST). But if the third Friday falls on a holiday, the expiration date will instead occur on the Thursday immediately prior to the third Friday.

Weekly options are available with expiration ranges between one and five weeks, while monthly options are generally available from one to 11 months out. Weekly options are identical to monthly options in every respect except for the shorter expiration date. They are typically introduced each Thursday and they expire eight days later on Friday.

Options with longer than one year until expiration are generally referred to as Long-Term Equity Anticipation Securities (LEAPS). Aside from possessing extended expiration dates, LEAPS are identical to regular monthly options and expire the third Friday of the contract month at 3:00 p.m. CST.

Weekly options are available with expiration ranges between one and five weeks, while monthly options are generally available from one to 11 months out. Weekly options are identical to monthly options in every respect except for the shorter expiration date. They are typically introduced each Thursday and they expire eight days later on Friday. 

Some underlyings will list weekly options with up to five consecutive weekly expirations provided the weekly listing does not expire on the same date as a regular monthly contract.

Like regular monthly options, weekly contracts also expire on the indicated expiration date at 3:00 p.m. CST. And like regular monthlies, the expiration date will normally fall on a Friday, unless it falls on a holiday, in which case it will be adjusted for Thursday.

Options with longer than one year until expiration are generally referred to as Long-Term Equity Anticipation Securities (LEAPS). Aside from possessing extended expiration dates, LEAPS are identical to regular monthly options and expire the third Friday of the contract month at 3:00 p.m. CST. But if the third Friday falls on a holiday, the expiration date will instead occur on the Thursday immediately prior to the third Friday.

When evaluating a potential options position, most investors and traders consider not only price, but also time until expiration. Time until expiration may also be referred to as “days-to-expiration,” or DTE.

Choosing an expiration date depends heavily on the type of strategy utilized by the investor/trader, and his or her outlook for a given position.

For example, if a trader or investor is trying to capitalize on a potential opportunity in the immediate future, he or she might opt for a short-term option position, such as a weekly or the front–month regular monthly contract. The term “front month,” also known as "near month" or "spot month," refers to the nearest expiration date for a regular monthly options contract.

On the other hand, if the investor/trader is attempting to capitalize on a potential opportunity that may develop over a longer window of time, he/she might opt for an option with two, three, or even more months until expiration. Options with longer duration are typically referred to as “back month” or “far month” contracts.

Another component of options expiration is trade management. A key consideration regarding trade management is deciding when one should close a position. Because options have a finite life, traders basically have two choices when it comes to the trade management of any given position. The trade can be left on until it expires, or it can be closed at some point prior to expiration.

tastylive has covered the expiration topic extensively and conducted a detailed series of market studies to provide additional context and insight into the expiration process.

One theme studied extensively by tastylive is the optimal duration of short option trades. While the trade duration depends heavily on a trader's outlook, strategic approach, and risk profile, the research studies conducted by tastylive on short options revealed that a 45-day duration (i.e. 45 days-to-expiration) has a nice blend of an accelerating extrinsic value decay curve, while still providing a decent amount of space away from the stock price to obtain extrinsic value premium on trade entry.

At expiration, one of two things happens depending on whether the option is in-the-money (ITM) or out-of-the-money (OTM). If an option has intrinsic value to the owner, it is considered ITM. If it does not, it is considered OTM.

If an option expires in-the-money, it will be automatically converted into 100 long or short shares of stock in the associated underlying.

For long in-the-money options, market participants may decide (in certain cases) not to exercise a given option.

In such cases, the investor/trader submits a Do Not Exercise Request (DNE Request) to their broker. The cutoff time for submitting a DNE Request may vary by broker. Generally speaking, market participants planning to submit a DNE request should do so promptly after the close of trading on the day of expiration, or close the trade prior to expiration.

If an option expires in-the-money, it will be automatically converted into 100 long or short shares of stock in the associated underlying.

There are some cash-settled products like SPX that do not have shares, so ITM options simply settle to cash at expiration.

For long in-the-money options, market participants may decide (in certain cases) not to exercise a given option.

In such cases, the investor/trader submits a Do Not Exercise Request (DNE Request) to their broker. The cutoff time for submitting a DNE Request may vary by broker. Generally speaking, market participants planning to submit a DNE request should do so promptly after the close of trading on the day of expiration.

If an option expires out-of-the-money, it therefore expires worthless, and it disappears from the account. An OTM option has no intrinsic value to the option holder, so it has no worth to the owner at expiration.

Spread traders need to be careful holding ATM spreads through expiration, because if only one option expires ITM and the other expires OTM, the spread that has defined risk will be converted to 100 shares of long or short stock depending on whether it is a put or call. In high priced stocks, a narrow spread can all of a sudden become 100 shares of risk, so be mindful of spreads that are teetering on the stock price close to expiration. To avoid this risk, traders can close the spread just prior to expiration.