Finer Points of Expiration

Once a month, options expiration rolls around. But options expiration requires some study to understand. Let’s take a look at some options expiration finer points.

1. While we always refer to “expiration Friday,” options don’t actually expire until Saturday. Technically, expiration occurs on the Saturday following the third Friday of the month. In rare occasions, the Good Friday market holiday falls in expiration week. In this situation, options still expire on Saturday, but the last day of trading is Thursday.

2. Index options are a little different. Index options expire a day before their equity brethren, closing for business on Thursday. They are almost all European style (read on for more details) and are cash settled, meaning investors either receive or pay cash rather than trade actual shares at expiration.

3. Learn your automatic exercise. Brokerage firms, in cooperation with the Options Clearing Corporation, attempt to protect option holders by automatically exercising in-the-money options, unless instructed otherwise. Equity options expire it they are in-the-money by a penny.

4. Those Crazy Europeans. Here in America, option traders can exercise equity option contracts on any trading day until expiration. European-style options expiration, however, means a trader can only exercise his or her contracts during the last trading day. Many U.S. index options are European-style exercise.

5. Triple Witching is nothing too scary. Triple-witching is expiration Friday in March, June, September, and December when three classes of derivatives expire: equity options, index futures, and options on index futures. Heavy volume can spark unusual volatility.

Dan Passarelli, Market Taker Mentoring

Trader Education