Last updated on August 9th, 2022 at 09:53 am
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All options contracts have an expiration date. The length of time between the start of the contract and the expiry will vary depending on the type of options.
Knowing how long an option has until expiry is an important aspect of the trading process.
Options can last a few days, one week, one month, or one year before expiring. The standard contract length for most options is one month.
However, advancements in the industry have made options expiry times more flexible. Derivatives brokers now offer contracts with lengths between a week and a year. You can buy also option contracts on indexes (like SPY) that expire every other day (Monday, Wednesday, and Friday).
In the rest of this article, you’ll learn about the different types of options and how long they will typically last.
Why You Need To Know The Length Of An Options Contract
Knowing the length of an options contract is a must for all options traders because you can no longer trade it once the contract has expired.
When you buy an options contract, you’re purchasing the right to sell or buy the underlying asset that is the focus of the contract at a specified strike price.
Your right is only valid within a specific time frame.
As soon as the contract gets to the stipulated time (the expiry date), it will expire and become worthless if the buyer doesn’t exercise the option. Most option sellers rely on unexercised and expired option contracts to make money.
As a buyer, ignoring an option at expiration may lead to losses. You’d typically lose the premium paid for the contract. However, you may also have to offset price changes if the option is exercised automatically and you get a margin call.
The Different Options Contract Length You Should Know
There are three main options contract lengths you should know about:
Traditional Monthly Options
Traditional monthly options are the standard contracts offered by most brokers. These expire on the third Friday of every month.
Ideally, they are supposed to last four weeks, but some traders only hold them for three weeks or less. The contracts are made available a few days after settlement for the preceding month.
Long-Term Equity Anticipation Securities (LEAPS)
These options are designed to last up to one year from the initial trade data. LEAPS are similar to standard options. The main difference is how long they can last.
These options are for people with a long-term view of specific assets. Savvy investors rely on them to manage long-term risks overall.
As the name implies, weekly options are designed to last one week. They have the same contract specifications as all other option contract types, but the main difference is that they are designed with a short-term view in mind.
Typically known as “Weeklys,” this category of options has grown in popularity in recent years as it allows traders to manage short-term risks better. Some brokers now offer weekly options lasting up to five weeks.
You can buy monthly, weekly, or LEAPS options at any time before they expire. The nearness to the strike price and the length of time remaining on the contract will determine the cost of the premium (as will the volatility of the stock).
Do All Options Expire at Market Open or Market Close?
All standard options expire at market close on the day of the expiry. So if your option expires on September 1st you have until the end of trading on that day to sell or exercise the option.
Other types of options have slightly different expiry approaches. Your broker will communicate the exact expiry before you purchase the contract to prevent confusion.
For example, the expiration system in place might vary slightly from one broker to another with exchange-traded options. US Equity stock options listed on the exchange typically expire on the Saturday after the third Friday of any month but you can’t trade them after the markets close on Friday.
Weekly options expire every week at market close on Friday. However, as with other options, the close will be moved back by one day in a situation where Friday is a market holiday.
Many traders close out their options positions before expiry instead of exercising it. If you have such a strategy, it’s best to consult your broker to get all the necessary information regarding the expiration date of your options.
While some brokers frequently communicate with clients, others may send out only one notification at the start of your contract, which you might miss.
Knowing when your options will expire is important because any options contract in the money before or during expiry will typically be exercised or sold automatically. However, an options contract that’s out of the money at expiration time will not be exercised automatically.
The Length of European-Style Options Contracts
European-style options contracts last as long as their American counterparts. They can expire weekly, monthly, or yearly. Most of them expire at the close of business on the expiration date.
However, some of them expire the next morning after the predetermined expiration date.
If you trade European options, you should pay more attention to the expiry dates as it’s often easy to forget the dates or confuse them with American options.
Are the Lengths of Options Contracts Flexible?
The lengths of options contracts are not flexible. Once the contract has kicked in, the expiry date is locked in. However, traders can make trading decisions (such as selling or exercising) the contract before expiry.
You can choose to exit an options contract by selling it or exercising it ahead of the expiry.
The position might end in profit or loss depending on the distance between the current price and your entry price, the distance from the strike price, etc.
Since you can’t extend the duration of an options contract, it’s best to do your analysis properly before taking a position.
Options can last as long as one week or even up to multiple years, depending on the specifics of the contract. Experienced traders make sure to confirm the expiry date on all their positions and take the necessary actions based on their trading strategy.
Forgetting the expiry date on any options contract might be inconsequential but can also make you money or lead to losses.
The outcome will come down to whether you’re the buyer or seller of an option. It’s also influenced by whether the option is in the money or out of the money.