The expiration time of an options contract or other derivative is the precise date and time when the contract becomes null and void. Derivatives contracts that finish out of the money (OTM) at this crucial time will become worthless, while in-the-money (ITM) contracts will be evaluated based on the settlement price upon expiry.
Generally, the expiration time is more specific than the expiration date and should not be confused with the last time to trade that option.
Key Insights
- The expiration time is the exact moment derivatives contracts cease trading and any remaining responsibilities or rights are settled or expire.
- Typically, the last day to trade an option is the third Friday of the expiration month.
- Derivative contracts explicitly state the exact expiration date and time.
Demystifying Expiration Time
Expiration time and expiration date are not identical. The expiration time is when the option actually expires, whereas the expiration date is the deadline for the holder of the option to declare their intentions. Most option traders need only focus on the expiration date, but knowing the expiration time can also be beneficial.
According to NASDAQ, the expiration time is:
The time of day by which all exercise notices must be received on the expiration date. Technically, the expiration time is currently 11:59 a.m. Eastern Time on the expiration date, but public holders of option contracts must indicate their desire to exercise no later than 5:30 p.m. Eastern Time on the business day preceding the expiration date.
For many public holders of options in the U.S., the last trading day for an option is typically the third Friday of the expiration month, while the expiration date is the Saturday immediately following it. Should Friday be a public holiday, the last trading day is Thursday.
Option holders usually must notify their brokers of their intention to exercise no later than 5:30 p.m. on Friday. This arrangement allows brokers to inform the exchange of the holders’ intentions by the official expiration time on Saturday.
Notification limits can vary depending on the exchange where the product trades. For example, the Chicago Board Options Exchange (CBOE) limits trading on expiring options until 3:00 p.m. Central Time on the final trading day.
Derivatives Contract Expiration
An expiration date in derivatives marks the last valid day of an options or futures contract. When investors purchase options, these contracts give them the right (but not the obligation) to buy or sell assets at a predetermined price, known as the strike price.
Exercise of the option must happen within a specific period, which is on or before the expiration date. If the investor chooses not to act, the option expires worthless, leading to a loss of the money paid to purchase it.
Listed U.S. stock options generally expire on the third Friday of the contract month. If this Friday is a holiday, the expiration date moves to the prior Thursday. Once an options or futures contract surpasses its expiration date, it becomes invalid. The final day to trade equity options also falls on the Friday before expiry.
Caveats at Expiration
Most options do not live until their expiration dates, as traders often offset or close positions earlier. However, some options do reach their actual expiration times, presenting unique dynamics because the last trading moment can occur before expiration.
This timing discrepancy isn’t an issue when the underlying security stops trading simultaneously. But if the underlying security trades beyond the option’s final close, both buyers and sellers might find automatic exercise for ITM contracts. Conversely, after-hours trading could shift a potentially ITM position to OTM status, thwarting automatic exercise.
Traders must be aware of these dynamics, especially changes to rules regarding the final recorded price of the underlying, and should verify with both their exchange and brokerage.
Example: SPXW Weekly Options
SPXW options form part of the weekly expiration cycle on the S&P 500 Index listed by the CBOE. SPXW Weeklys typically settle on the last trading day—usually a Friday for End-of-Week Weeklys as with other afternoon-settled index options, the exercise-settlement value derives from the final reported sales price in the primary market of each component stock. On expiry day, trading in expiring SPXW Weekly options concludes at 3:00 p.m. Central Standard Time (CST), while non-expiring SPXW continued options trade until 3:15 p.m. CST.
Related Terms: Settlement Price, Strike Price, Options Contract, Derivatives, In-The-Money, Out-Of-The-Money.
References
- NASDAQ. “Expiration Time”.
- NASDAQ. “Expiration Date”.
- Cboe Exchange, Inc. “Hours & Holidays”.
- CME Group. “Understanding Listings and Expirations”.
- Cboe Exchange, Inc. “S&P 500 Index Options”, Page 2.
