What Is Expiration Time?
Let me explain to you what expiration time really means in the world of options and derivatives. It's the exact date and time when the contract's value can't be altered anymore, and all obligations from traders must be settled. If a derivative ends out of the money at expiration, it becomes worthless, but if it's in the money, we evaluate it based on the settlement price at that moment.
Remember, expiration time is more precise than just the expiration date, and you shouldn't mix it up with the last time you can trade the option.
Understanding Expiration Time
Expiration time is different from the expiration date because it's when the option truly expires, while the date is your deadline as the holder to declare your intentions. As a trader, you mostly need to worry about the expiration date, but knowing the exact time can be handy.
According to NASDAQ, expiration time is the cutoff by which all exercise notices must be received on the expiration date. Technically, it's 11:59 a.m. Eastern Time on that date, but if you're a public holder, you need to indicate your desire to exercise no later than 5:30 p.m. Eastern Time on the business day before.
Since many of you deal with brokers, your expiration times might vary. In the U.S., the last day to trade an option is usually the third Friday of the expiration month, and the actual expiration is the following Saturday. If that Friday is a holiday, the last trading day shifts to Thursday.
As a public holder, you typically have to declare your exercise notice by 5:30 p.m. on Friday, giving your broker time to notify the exchange by the actual expiration on Saturday.
Important Notification Limits
These notification limits depend on the exchange. For instance, the Chicago Board Options Exchange (CBOE) stops trading on expiring options at 3:00 p.m. Central Time on the last trading day. You need to be aware of these specifics for the products you trade.
Derivatives Contract Expiration
An expiration date in derivatives marks the last day a contract like options or futures is valid. When you buy options, they give you the right—but not the obligation—to buy or sell assets at a set strike price.
You must exercise that option on or before the expiration date. If you don't, the option expires worthless, and you lose what you paid for it.
For listed stock options in the U.S., expiration is usually the third Friday of the contract month. If that Friday is a holiday, it moves to the Thursday before. Once past expiration, the contract is invalid, and the last trading day for equity options is the Friday before expiry.
Caveats at Expiration
Most options don't make it to expiration because traders close or offset positions earlier, but some do reach their actual expiration times. This can create unique situations since the last trading time might be before the expiration time.
It's not an issue if the underlying security stops trading at the same time, but if it trades after hours, you might see automatic exercises for in-the-money options. Or, you could expect an exercise, but after-hours moves push it out of the money.
Rules for these scenarios, like when the final underlying price is recorded, can vary. I advise you to check with the exchange and your brokerage to stay informed.
Example: SPXW Weekly Options
Take SPXW weekly options on the S&P 500 Index, listed by the CBOE. These settle on the last trading day, usually Friday for end-of-week Weeklys.
Like other afternoon-settled index options, the exercise-settlement value comes from the last closing sales price of each component stock in their primary market. On the last trading day, expiring SPXW Weeklys stop trading at 3:00 p.m. Central Standard Time, while non-expiring ones go until 3:15 p.m. CST.
Key Takeaways
- Expiration time is the exact date and time when derivatives contracts stop trading, and rights or obligations expire or come due.
- The last day to trade an option is typically the third Friday of the expiration month.
- Contracts specify the precise expiration date and time.
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