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Best Practices

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Expiration Week

Best Practices

Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

Options, futures and other derivatives contracts all have expiration dates. The expiration date is the day that these contracts cease trading and receive their final settlement value.

Traders often must make decisions at expiration in regards to their open positions and these decisions can be very important. Post-expiration, a trader may have a very different position with very different risks. These risks and positions (along with added fees) are easily avoidable with simple actions.

Standard equity options (and most index options) expire on the 3rd Friday of each month. A slide has a table which lists several different underlyings, what the underlying settles to (cash or a position in a derivative), whether the expiration is on the open or close and what the settlement value is based upon.

When approaching expiration what decisions does a trader have to make? The first step is to see if a position is in or out of the money and if it is close to the strike. A position that expires out of the money will expire worthless and come off the books. A position that is close to the strike can see its value increase or decrease rapidly because of “gamma” (see Options Jive 7/7/15 for an explanation of gamma).

The most important decision involves positions that are in-the-money (ITM) and should come first. A trader must choose to either close the position, roll the position or take assignment (and have a position in the underlying).

Watch this segment of Best Practices with Tom Sosnoff and Tony Battista for a valuable discussion about expiration and a great “cheat sheet” for your files.

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