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Options Definition: Expiration Date

On an options exchange, every 3rd Friday of the month is an expiration day ďż˝ this means that a number of options series expire on this day.

At the end of the expiration date, all those call options whose strike prices are higher than the price of the underlying stock or index will be worthless. On the other hand, those options series, whose strike prices are lower, will have some intrinsic value and may be exercised. In the case of put options, the opposite applies.

The options expiration date is the most important factor in calculating options prices:

  • The Black Scholes model is used to price European style options. This is done by factoring in current stock prices, strike prices, time left until expiration, interest rates, any dividends, as well as the volatility of the underlying security.
  • The binomial model is used to price American style options. The binomial model calculates a tree of stock prices for various given time intervals within the expiration period. Using the volatility of a stock and the time left to expiration, the model determines how much a stock might increase or decrease in value. This calculation gives all possible prices for a stock. Then, working backward from the expiration date to the present, option prices are calculated using a risk neutral valuation. Ultimately, a each option is priced .

Option Style: There are American style and European style options. American style options can be exercised at any time up to the expiration date. European style options may be exercised only on the expiration date itself.

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The Information on the Site is provided for information purposes only. The Information is not intended to be and does not constitute financial advice or any other advice. The trading of stocks, futures, commodities, index futures or any other securities has potential rewards, and it also has potential risks involved. Trading may not be suitable for all users of this Website. Past performance is not necessarily an indication of future performance. You absolutely must make your own decisions before acting on any information obtained from this Website.

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