EXPIRATION, LAST TRADE DATE & WHAT TO EXPECT AT EXPIRY

What is Options Expiration?

Options expiration refers to the specific date and time an options contract becomes void. After this date, the right to exercise the option no longer exists. Every options contract comes with a clearly defined expiration date, which marks the last day the holder can exert rights to buy or sell the underlying asset.

The process of expiration is crucial to options trading, affecting both the value of the contract and the strategies used by traders. Depending on the type of option — American or European — expiration rules can vary. American-style options can be exercised any time up to and including the expiration date. European-style options can only be exercised on the expiration date itself.

For equity options listed in the United States, expiration typically occurs on the third Friday of the contract’s expiration month. If that Friday is a holiday, expiration will occur on the preceding Thursday. For contracts traded in other regions or on different underlying assets such as indexes or ETFs, separate calendars may apply.

Expiration directly impacts an option’s “time value.” As the expiry date approaches, the extrinsic value of the options contract tends to decay, especially in the final 30 to 45 days — a phenomenon known as 'time decay' or 'theta decay' in options pricing.

Understanding expiration is key, especially for traders employing strategies dependent on timing, such as covered calls, spreads, and cash-secured puts. The proximity of expiration affects decisions about rolling positions forward, closing contracts prior to expiration, or allowing them to expire naturally.

Finally, upon reaching expiration, a determination is made regarding whether the contract is in the money (ITM), at the money (ATM), or out of the money (OTM). This outcome impacts whether the option will be exercised, expire worthless, or be automatically executed by the exchange clearinghouse depending on the strike price relative to the market value of the underlying asset.

Key Concepts

• Expiration Date: The final date the contract is valid.
• American vs. European Style: Exercise rules depend on contract type.
• Time Decay: Options lose value faster near expiry.
• Automatic Exercise: In-the-money options may be automatically exercised.

When Is the Last Trade Date?

The last trade date is the final day on which you can buy or sell an open options contract before it expires. While it might be confused with the expiration date, the two are not always the same, particularly in non-U.S. markets or for index options. It’s essential for traders to understand when their ability to act on a position ends before expiry sets in.

For standard U.S. listed equity options, the last trade date is typically the same as the expiration date, which falls on the third Friday of the expiration month. Trades can generally be executed up until market close (usually 4:00 p.m. Eastern Time) on this day. However, nuances exist depending on the exchange and type of option. For example, quarterly options, index options, or futures options may have a different last trading day — sometimes one or two days prior to expiration.

Failing to act before the last trade date leaves limited alternatives. If the position is in-the-money and held through expiry without being closed or exercised, it may be automatically exercised by the broker. Conversely, out-of-the-money options will expire worthless. For spreads or complex multi-leg strategies, failing to close or adjust a position by the last trade date can result in unexpected exercise, assignment, or even margin calls.

It is advisable to track the correct trading calendar of each option product. Exchanges such as the Chicago Board Options Exchange (CBOE) and platforms like the Options Clearing Corporation (OCC) publish detailed schedules, which traders should consult regularly to avoid missteps and optimise outcomes.

A common mistake is misjudging liquidity on the last trade day. Traders may find it harder to close or roll large positions if bid-ask spreads widen due to diminishing interest, especially in thin-volume options.

Tips for Last Trade Day

• Know Your Calendar: Review specific expirations per product.
• Check Liquidity Early: Don’t wait till the last hour.
• Plan Ahead: Consider closing or rolling positions days before.
• Work with Your Broker: Use alerts for critical dates and actions.

What Happens When Options Expire?

When an options contract reaches its expiration, the rights associated with the contract cease, causing one of several possible outcomes depending on its status — ITM, ATM, or OTM. Understanding what specifically happens at expiration helps investors manage risk, avoid unforeseen consequences, and better design their trading strategies.

If an option is in the money at expiration, it can be exercised. For a call option, this means the holder can purchase the underlying security at the lower strike price. For a put option, the holder can sell the underlying at the higher strike. Brokers may automatically exercise ITM options unless instructed otherwise, especially if the benefit is worth more than a small threshold (often defined as $0.01 in the money).

If the option is out of the money or at the money, it usually expires worthless. The buyer loses the premium paid upfront, while the seller retains that premium as profit. No transaction or ownership change occurs in this case. This automatic process eliminates the need for any manual cancellation.

For traders with open option positions, this may result in assignment. If a holder lets their short option expire ITM, they may be forced to buy or sell shares, thus leading to significant capital commitment or losses if unanticipated. Assignment can occur even without prior notice, making it crucial to monitor positions ahead of expiry.

Settlement at expiration varies by asset class. Options on individual stocks typically settle with actual delivery of shares, whereas index options – such as SPX – are often cash-settled, paying out the difference between strike and index value without requiring any exchange of securities.

It's also possible to "roll" a position ahead of expiration — meaning to close one contract and open another with a later expiry date. This allows traders to potentially extend their market exposure or fine-tune strategy without allowing the contract to expire and trigger automatic consequences.

Factors to Consider at Expiry

• Contract Status: ITM, ATM, or OTM affects expiry outcome.
• Automatic Exercise: Broker policies may trigger it.
• Assignment Risk: Important for sellers of options.
• Cash vs. Physical Settlement: Depends on underlying asset.

To manage expiry effectively, it’s advisable to review all open positions at least a week in advance of key expiration dates — particularly if the contracts are close to being in the money.