Option Expiration Dates
Option Expiration Dates
When an option contract gets listed, it is given a specific ‘expiration date’.
There are many different types of expiration dates currently, and more will probably be introduced in the future.
For example, most stocks that have a high volume of trading have options that expire every month.
This type of ‘monthly option’ expire on the 3rd Friday of every month.
Many stocks now also have ‘weekly options’ which expire every week.
The bottom line is that all option contracts have a finite lifespan, and since they have a finite lifespan, they experience something called ‘time decay’ - also known as ‘theta decay’ - throughout the course of the option’s life.
So why do options expire?
Well, one way to picture an option is to think of it as a ‘leveraged transfer of risk’.
In many ways, the concept of an options contract is very much like an insurance policy.
When someone purchases an insurance policy, there is usually a time frame that comes along with it.
Many insurance policies need to be renewed every year and throughout the term of the policy, the owner of the policy pays the insurance company a premium to assume the risk of loss during that particular time frame.
Then, when the term expires, the insurance company is not responsible for that risk any longer unless, of course the insurance policy is renewed and an additional premium is paid.
Option contracts are very much the same as the seller of the option contract takes on the risk of the underlying instrument making a specific move.
The person who is selling the option gets paid a premium just like the insurance company.
However, as soon as the option expires, the seller of the option is no longer responsible for the risk.
