What is an expiration date?An expiration date is the date at which an option expires. Let us look at an example. Say you buy a call on stock XYZ for $45 for $2. The stock is at $44. You have just bought the right to buy the stock at $45 by a certain date. If the stock does not move up and you do not exercise your right to buy it at $45 by is expiration date your option expires worthless. You lose your whole $2. Now how can you tell the date at which a given option will expire? Simple, each option has a date and a target price. If you buy a December $50 call your option would expire on the 3rd Friday of December. To learn more on how to read stock option chains here is a brief article on How to buy stock options that can really help you out a lot. Options always expire on the 3rd Friday of the stated month. However, there are a few special options that do not expire at that time. Although rare you will occasionally you will find a stock with 2 December $50 call options. If this is the case call your broker to see which option expires when.
Which Expiration Date Should You Choose? While most traders consider it a good idea to buy an option with a far expiration date, everyone is different. The farther away expiration the more time value you will have and the less it will decay. However it is also more expensive then stock options that are closer to expiration for the same reason. Every trader is different. Some traders prefer options that are going to expire in 1 month simply because they are only going to be in the trade for a couple days at the most. Other traders like options that do not expire for 1 year or two (options that do not expire for 1+ year(s) are called leap options). This gives the stock plenty of time to make a move before the option comes due. |
