Stock options contracts are made up of a few different components: the underlying stock in question, the strike price, the number of shares, and of course, the options expiration date. Also known as the exercise date, this is the point at which you must choose to exercise your contract or let it expire.
But what happens when stock options expire? Do you lose money? Is there ever a situation in which you should let your contract expire?
In this complete guide, we’ll answer all these questions and many others you may have about the expiration date on your options contract. You’ll even learn how to pick the right options expiration date to set yourself up for success. First, let’s provide a quick introduction to options for those who are new.
Introduction to Stock Options
Our more detailed beginner’s guide on how stock options work is a great resource for you if you’re just getting started with this investment vehicle. However, here are the basics of what you need to know.
When you buy stock options, you’re purchasing a contract granting you the right – but not the obligation – to buy or sell a predetermined stock at a predetermined price (known as the strike price) before a predetermined date.
You can choose between two types of options contracts. Put options give you the right to sell the underlying stock in question, whereas call options give you the right to buy the underlying stock in question. The difference is best illustrated by explaining the situations in which you’d use them:
- You’d purchase put contracts when you expect the underlying stock to fall in price so you can then exercise your option to sell the stock at a premium price point (the strike price).
- On the other hand, you’d purchase call options when you expect the price of said stock to increase in price – allowing you the option to then buy that stock at a discount (the strike price).
In either situation above, you are poised to earn a profit from the difference in actual stock price and the strike price of your contract. The great thing about options is that your downside is limited just to the price of the contract itself – whereas your upside can be unlimited.
However, all of this is only possible if your contract is “in the money” before the options expiration date.
What is the Options Expiration Date?
The options expiration date is the deadline for you to exercise your option. This date is also referred to as the exercise date. Whatever you call it, it’s an incredibly important component of options contracts. That’s because on this date, your contract will expire and become worthless unless you choose to buy or sell the underlying stock in question.
The specific expiration dates vary from one type of option to another and are listed on the options chain when you look up a particular stock. You can also find them printed on your confirmation statement after purchasing an option contract.
There are options contracts with timelines as short as one month, and then there are some with lifetimes of up to three years. As you can imagine, options contracts with expiration dates further in the future are more favorable for you as an investor – because you have more time and opportunity for your contract to get “in the money” compared to contracts with a closer expiration date.
Options usually expire on what’s known as “expiration Friday” – the third Friday of each month (unless that Friday falls on a holiday). This is because exchanges don’t want their traders to have to worry about expirations over weekends.
However, some contracts may also have what’s called “weekly options”, which expire on any Friday of the month. Some contracts may even expire every day – though this is usually only the case for highly liquid stocks with an extremely high demand for options trading.
Either way, you came here because you want to know what happens when stock options expire. And in the next section, you’ll find out…
What Happens When Stock Options Expire?
When stock options expire, the contract becomes null and void – as we said earlier. But if you’re in the money, it’s likely your contract will be exercised automatically. In these cases, your contract is converted into shares of stock at the strike price. It will look a bit different depending on the specific type of contract you purchased – call or put.
When it comes to stock options, long calls are transformed into 100 shares of the underlying asset at the strike price while short calls become converted to -100 shares. On the other side of things, long puts are instead switched over to -100 shares and short puts turn into 100 respective stocks at their pre-defined rate. From there, you’re free to continue managing your position in stock – or sell your position right away and capture cash profit.
Do You Lose Money if Options Expire?
That’s what happens when stock options expire in the money. But, what happens when stock options expire out of the money? Do you lose money? Yes – unfortunately, this outcome results in a loss. However, your downside is only limited to the premium you paid for the contract.
What Time Do Options Expire?
Options expire at what’s known as the “closing bell”. That’s when the stock market closes and all trades are finalized. After that time, no more options contracts can be traded and any remaining positions will become worthless – they’ll simply disappear from your account.
American vs European Options Expiration Dates
It’s important to note that when it comes to American or European options, the expiration date is a bit different. American options can be exercised at any time before expiration, while European options can only be exercised on the expiration date. This distinction is key, as European options can be much less favorable to the investor.
Your Choices With Stock Options Contracts Before the Options Expiration Date Arrives
There are three choices you can make any time you purchase stock options contracts. The decision you make will be influenced by the situation in question. Ideally, you’d be in the money before the expiration date and exercise the option. However, if that isn’t the case, you can either sell the contract or let it expire worthless.
Exercise the Stock Options Before Expiration When it’s in the Money
The goal when purchasing any stock options contract is to end up in the money. This is what occurs when the present-day stock price is trading above (if you bought call options) or below (if you bought put options) the strike price of your contract.
For example, if you bought a call options contract for company XYZ with a strike price of $20/share and an exercise date of 6 months out. After a week the share price raises a bit to $21/share – your contract is in the money because if you exercise it, you stand to gain a profit.
Or, let’s say you bought a put options contract for the same company with the same strike price and expiration date. After a week, the stock drops in value down to $19/share. Your contract is in the money – and you can exercise the option to sell that stock at a premium of $1/share.
Obviously, this is the ideal outcome. And it’s something you can enjoy at a high rate of consistency when you leverage the VectorVest system (more on that later).
But – what if your contract is out of the money and the options expiration date is rapidly approaching? There are two choices.
Sell the Options Contract for Whatever You Can Get
If there is still enough time before the expiration date that your contract has value – but you’re ready to cut losses and move on to another opportunity – you can try to sell your options contract.
You will likely not make what you paid for the contract, but you can recoup some of your losses by selling it off to another willing buyer. Just know that the closer your contract is to the expiration date, the less value it has.
Let the Options Contract Expire
If the expiration date is here – or is rapidly approaching – and you’re still out of the money, chances are, you’ll be unable to flip the contract and recover any of that premium paid. So, you’ll just let it expire and do nothing – as exercising the contract would likely result in a greater loss than the premium you paid.
But, because you can find great prices on options contract, your downside is fairly limited – making these an attractive investment vehicle for many strategies.
And if you want to learn more about how to start trading options at a high rate of success, keep reading below. We’ll let you in on a few tips to let you pick options that get in the money before expiring – with a consistent, repeatable approach!
Tips for Getting in the Money Before the Options Expiration Date Comes
As with beginner swing trading strategies, there are certain tactics you can employ as an options trader to increase your odds of success – keeping your losses as small and infrequent as possible. The two biggest things you can do to accomplish this is choosing favorable contracts and using software to uncover, monitor, and exercise potential options contracts. Let’s quickly talk about how to pick the right options expiration date.
How to Pick the Right Options Expiration Date
The ideal options expiration date may vary from trader to trader. That’s because there is a direct correlation between the time until expiration and the option premiums you pay. Generally, the closer to expiration your options are sold, the less you’ll have to pay for that contract.
So – if you’re new to options trading and want to limit risk, look for contracts with a lot of time left until expiration. Sure, the contract will cost more – but you’ll have more time on your side. You just need the present-day strike price to get you in the money at some point in time with American options contracts.
On the other hand, if you want to maximize your return by buying cheaper options contracts, you can choose an expiration date that’s closer out – like a week or one month. These will be much cheaper as you have less time to work with. It’s important to pick the right options expiration date based on your risk tolerance and trading goals.
Use VectorVest to Find and Validate Opportunities in the Stock Market
While finding contracts with more favorable terms increases your likelihood of success, the best thing you can do is use a stock forecasting software to uncover and validate opportunities in the stock market. Sure, it’s the best platform for swing trading. But because stock options are entirely dependent on the underlying stocks in question, it can aid you with buying options contracts as well!
It tells you exactly what to buy, when to buy it, and when to sell it – helping you time your contract to perfection. By identifying a trend early – before the rest of the market does – you can get more favorable terms for your options contract. VectorVest helps you do just that. And, it gives you insight into stock sentiment – so you can assess when investors are starting to turn on a stock and it may be ready for a price reversal.
With VectorVest, you don’t have to waste your time manually tracking technical trading indicators, following moving averages, or using other complex, time-consuming tactics to analyze a stock. Instead, just rely on three simple ratings that tell you everything you need to know to make informed, emotionless decisions: relative value (RV), relative safety (RS), and relative timing (RT).
The best part? You’re given a clear buy, sell, or hold recommendation for any given stock at any given time. The value VectorVest provides in your strategy is immense – and you can even take the stock analyzer software on the go through the stock advisory app. If you want to see it in action, try our free stock analyzer today.
Parting Thoughts on What Happens When Stock Options Expire
That concludes our full discussion on stock options expiration dates. Now that you know what happens when stock options expire and how to pick the right options expiration date, you should feel more confident navigating options trading.
But if you want to learn more about these contracts beyond the stock options expiration date, we have other in-depth resources in our blog. Read about stock warrants vs options, when to exercise stock options, taxes on options trading, options trading risk, stock vs stock options, swing trading vs options trading, or even swing trading options!
Otherwise, it’s time to get your Vectorvest account set up and jumpstart your journey to consistently profitable trading. You won’t look back once you see what the system can do for your life!