The Rules. As an option approaches expiry, there are three choices to be made: sell the option, exercise the option, or let the expiration expire.
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Options Expiration Calendar
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It is for this reason that the expiration date is a significant variable for options traders. The concept of time is an essential factor of what gives the options their value. The longer the time-lapse of the traded option contract is, the higher the chances that the investor has that the asset will reach the strike price. Following this logic, the closer the option contract gets to expiration date, the less valuable the option becomes. As the trend of the stock price gets more predictable, the time value of the contract will reduce accordingly.
Once the option reaches expiration date, the time value of the contract will cease to exist. Futures are more different than options in the sense that they never render valueless at expiry, as there is no such thing as an out of the money future. Technically the profile of a long future investment is the same as buying an asset and waiting for the price to fall or rise, the difference being that the payment is postponed. Automatic exercise is the system implemented by the investment bank to protect the option holder who forgets about the expiration date or otherwise would be unable to exercise their option contracts that are in the money at expiration.
Here the Option Clearing Corporation OCC automatically exercise the in the money option contracts and assign the underlining asset to the trader so that they may benefit from their investment. American style options can be exercised at any time during the time lapse between the date of purchase and the liquidation date.
European style options, on the other hand, can only be exercised on the specific date of liquidation when the contract expires. European and American options are not distinctive of a geographic zone, and both of them can be found in American, European, or even Asian markets. One might assume that American options carry a higher premium since they bring more versatility to the investor. The reality is different, because of the wasting asset nature of the derivatives.
Calls give the holder the right, but not the obligation, to buy a stock if it reaches a certain strike price by the expiration date. Puts give the holder the right, but not the obligation, to sell a stock if it reaches a certain strike price by the expiration date. This is why the expiration date is so important to options traders. The concept of time is at the heart of what gives options their value. After the put or call expires, time value does not exist. In other words, once the derivative expires the investor does not retain any rights that go along with owning the call or put.
The expiration time of an options contract is the date and time when it is rendered null and void.
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It is more specific than the expiration date and should not be confused with the last time to trade that option. Futures are different than options in that even an out of the money futures contract losing position holds value after expiry. For example, an oil contract represents barrels of oil.
If a trader holds that contract until expiry, it is because they either want to buy they bought the contract or sell they sold the contract the oil that the contract represents. Therefore, the futures contract does not expire worthless, and the parties involved are liable to each other to fulfill their end of the contract.
Those that don't want to be liable to fulfill the contract must roll or close their positions on or before the last trading day. Futures traders holding the expiring contract must close it on or before expiration, often called the "final trading day," to realize their profit or loss. Retail traders don't typically do this, but businesses do. For example, an oil producer using futures contracts to sell oil can choose to sell their tanker.
Futures traders can also " roll " their position. This is a closing of their current trade, and an immediate reinstitution of the trade in a contract that is further out from expiry.
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