Key Facts & Examples for Traders

What Is Expiration Time?

The expiration time of an options contract is the specific moment when its value is final and all obligations must be settled.

The role of expiration time in options trading is signifying when the option expires. This differentiates from both the expiration date, which is the deadline for declaring intentions, and the last trading time.

Knowing expiration time helps traders avoid unexpectedly exercising options.

An example of expiration time is in derivatives trading. At expiration time, traders must close their position, exercise their option to buy or sell, or let it expire.

Options out of the money (OTM) at expiration time become worthless, while in-the-money (ITM) options are assessed based on the settlement price at expiry.

The Impact of Expiration Time on Options Trading

Expiration time is when the option expires, while the expiration date is the deadline for declaring intentions. Most traders focus on the expiration date, but knowing the expiration time is also useful.

Nasdaq defines expiration time as:

The time of day by which all exercise notices must be received on the expiration date. Technically, the expiration time is currently 11:59 a.m. [Eastern time] on the expiration date, but public holders of option contracts must indicate their desire to exercise no later than 5:30 p.m. [Eastern time] on the business day preceding the expiration date.

Since many public holders of options deal with brokers, they face different expiration times. In the United States, the last day to trade an option is typically the third Friday of the expiration month, while the expiration date is the Saturday immediately afterward. If Friday is a public holiday, the last trading day will be on Thursday.

Public options holders must usually declare their exercise notice by 5:30 p.m. Friday. This time frame will allow the broker to notify the exchange of the holders’ intent by the actual expiration time on Saturday.

How to Navigate Expiring Derivatives Contracts

An expiration date in derivatives is the last day that an options or futures contract is valid. When investors buy options, the contracts give them the right, but not the obligation, to buy or sell the assets at a predetermined price, known as the strike price.

The exercising of the option must be within a given period, which is on or before the expiration date. If an investor chooses not to exercise that right, the option expires and becomes worthless, and the investor loses the money paid to buy it.

The expiration date for listed stock options in the U.S. is usually the third Friday of the contract month, which is the month when the contract expires. However, when that Friday falls on a holiday, the expiration date is on the Thursday immediately before the third Friday. Once an options or futures contract passes the expiration date, the contract is invalid. The last day to trade equity options is the Friday before expiry.

Key Considerations for Options Expiry

While the majority of options never reach their expiration dates due to traders offsetting or closing their positions before that time, some options do live on until their actual expiration times. This delay can create interesting dynamics because the last time for trading can be before the expiration time.

This time difference is not a problem when the underlying security also closes for trading at the same time. However, if the underlying security trades beyond the close of trading for the option, both buyers and sellers might find that the exercise of their contract is automatic if they were ITM. Conversely, they may expect the automatic exercise, but after-hours trading in the underlying asset may push them OTM.

Rules about when the final price of the underlying is recorded can change. So, traders should check with both the exchange where their options trade, as well as the brokerage handling their account.

Case Study: Navigating SPXW Weekly Options

SPXW are weekly expiration cycle options on the S&P 500 Index listed by the CBOE. SPXW Weeklys are settled on the last trading day, typically a Friday for SPXW EOW Weeklys.

As with other afternoon-settled index options, the exercise settlement value is calculated using the last (closing) reported sales price in the primary market of each component stock. On the last trading day, trading in expiring SPXW Weeklys closes at 3:00 p.m. Central time. All non-expiring SPXW Weeklys, meanwhile, continue to trade until 3:15 p.m. Central time.

The Bottom Line

The expiration time of an options contract or other derivative is the exact date and time when the instrument’s value can no longer be changed and all trader obligations must be settled. It is distinct from the expiration date, which is the deadline for declaring intentions.

Knowing the expiration time helps to avoid unintended trading consequences, especially for options approaching their expiry.

Traders should note the difference between the last trading time (which can be affected by after-hours trading, for example) and the expiration time, because this can influence options’ in-the-money (ITM) status.

Public options holders should pay attention to the exercise time deadlines imposed by their brokers and exchanges. While listed stock options usually expire on the third Friday of the month, holidays might shift these dates.

Verify expiration time details with both your brokerage and an exchange to ensure you make informed trading decisions.