Do You Trade Options On The Expiry Date?
Yes, you can trade options on the expiry date. For debit spread, you should consider selling profitable options before the expiry date because there are risks to maximize your limited profits.
People would really bid for worthless options hours from the expiry.
Trading options give you the right to sell or buy underlying security before the expiration of the option. When the option gets closer to expiration, it quickly loses its value.
All the weekly options expire on Friday, while monthly options expire on the third Friday of each month. The problem with options trading is, it becomes unpredictable on the expiration day.
What Is The Expiration Date?
It is the last date on which options expire, which expire at 4 pm. On or before this day, traders have already made their minds what to do with their expiring position.
So, before the expiration of an option, its owners choose what to do with it. They either close the position to see their profit or loss, or they let the contract to get expire worthlessly.
The Basics of Expiration Dates
In the United States, for monthly options, it is the third Friday of each month when the options expire. If there is a holiday on Friday, then automatically expiration date falls to the third Thursday.
Once the contract or option passes its expiry date, it is worthless and invalid. As the last trading day is Friday, so traders must decide what to do with their options. The index options also have the same expiry dates.
Expiration and Option Value
When a stock has a longer time to expiration, it means it has more time to reach its strike price, and thus the stock has more time value. In general, there are two call options, such as calls and puts. When you buy a call, it gives you the right to buy the stock when it reaches its strike price by the expiration date. On the other hand, when you buy a put, it gives you the right to sell a stock when it reaches the strike price by the expiration date.
So, that’s why expiration dates become important for the options traders. It’s the time that gives options value. When the call or put expires, the option has no value. In other words, we can say, after the expiration date, traders have no right to buy or sell their contracts.
Mistakes that Traders Make With Options
One of the most common mistakes that most traders make is that they forget the expiration dates of contacts. So, here are the mistakes that most traders make with options.
There are risks waiting for your options to expire. Therefore some people like to sell the options a few days to 15 days before to reap profit without risking further.
You open your option position to make a profit, and now your positions are near to expire. If you can see the profit, then you left your trade open on expiration day to get more profit. If you have a loss, then you try to get some of your money back.
The reality is, when the options get closer to expiry, they quickly lose their value. If you want to make more profit and wait for the expiration day, it can go against you. So, if you want to protect your trading capital, the best thing is to close your trade and get your profit or loss before the expiration day.
If you have a call option, and it has a strike price of $50 and the stock closes at the $50.03, then your option is automatically exercised. So in the coming week, on Monday, you can own 100 shares of stock.
If you don’t have left enough money in your stock, you will receive a margin call from your broker. So, in such situations, you will have to sell the stock so that you can close the trade. If you sell the stock at less than the strike price, then the loss will be deducted from your trading account. So, before putting yourself into such a position, close your options before the expiration day.
Traders buy American call options to have the right to own the stock. However, if you short puts or European call options, you must buy back the stocks or close your positions.
If your options expire and you didn’t close your position, you will have to pay higher prices to purchase the stock. You will also lose the commission that you paid while buying options. To avoid unnecessary fees and costs, buy your stock outright.
Seasoned traders also forget the expiration day. European-style options expire on every third Thursday of the month. While in America, monthly options expire on every third Friday of the month. If you have bought European options and you forget to close your position before the expiration, then your options will expire, and you wouldn’t realize it. If you have lots of money and trade big, then it can result in a massive loss. So to avoid this mistake, remember your European option trades closeout on Thursday. So, when you are in doubt, the best thing to do is set an alert or alarm so that you don’t forget the expiration dates. Otherwise, you will have to bear massive financial losses.
Do you trade options on the expiry date? Yes, you can, but when the options approach expiration date, they quickly start to lose value. So, the best thing to do is to close your position before the expiration day. Sometimes you forget the expiration day, and it ends up in massive financial loss. When people see they are in profit, they greed more and wait for the expiration day so that they can make more profit. However, it is a wrong practice. In this way, they are losing money, and they don’t realize it.
Close your position before the expiration date and see your profit or loss. If you forget to close your position or trade your option, then on Monday, you will receive a call from a broker. In this situation, you might have to lose your trading amount as well. So, the conclusion is, don’t wait for the expiration day and close your option early to avoid massive losses.
Sky Hoon. Read Full Bio
Website Owner, Twitter-er
He has been trading since 2008. He started this blog to share the journey about option trading. He dabbled in stocks, bitcoin, ethereum (in Celsius Network), ETF (lazy Dollar Cost Averaging) and also built websites for fun. He used this as a platform to share my experiences and mistakes in trading, especially options which I just picked up.