Expiration Time

What Is Expiration Time?

The expiration time of an options contract or other derivative is the exact date and time when it is rendered null and void. Derivatives contracts that finish out of the money (OTM) at the time of expiration will become worthless, while in the money (ITM) contracts will be evaluated based upon the settlement price upon expiry.

The expiration time is more specific than the expiration date and should not be confused with the last time to trade that option.

Understanding Expiration Time

Expiration time differs from the expiration date in that the former is when the option actually expires while the latter is the deadline for the holder of the option to make their intentions known. Most option traders need only be concerned with the expiration date but it is useful to know the expiration time as well.

According to NASDAQ, the expiration time is:

"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. Typically, the last day to trade an option is the third Friday of the expiration month. 

A public holder of an option usually must declare their notice to exercise by 5:00 p.m. on Friday. This time-frame will allow the broker to notify the exchange of the holders' intent by the actual expiration time on the expiration date.

Notification limits depend on the exchange where the product trades. For example, the Chicago Board Options Exchange (CBOE) limits trading on expiring options to 3:00 p.m. Eastern Time on the last trading day.

Derivatives Contract Expiration

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 United States 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.

Caveats at Expiration

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 does trade 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 covering these possibilities, especially at what time 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.

Example: 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 Standard Time (CST). All non-expiring SPXW Weeklys, meanwhile, continue to trade until 3:15 p.m. CST.