Although options trading is similar to trading stocks and other securities, the structure of the options market differs dramatically from the traditional stock market. If you are just starting out trading options, you may have questions, such as whether you can trade your options before the expiration day.
Trading options gives you the right in buying or selling the underlying security before the option expires. Options lose value as the expiration day approaches. Weekly options expire every Friday and monthly options expire the third Friday of each month. Options trading is unpredictable and volatile on the expiration day.
Option Contract Expiration
An option is a contract that allows you the right to buy or sell the underlying asset at a set price. All options contracts come with a set expiration date after which time you are no longer able to exercise your right to buy or sell. Options expire on the third Saturday of the expiration month.
To exercise your right to buy or sell prior to expiration, you must place an option trade by 5:30 PM New York time on the third Friday of the expiration month or on the third Thursday if Friday is a holiday at the exchange. Buying option on the expiration day, the time value of the option is quite small because options are expiring soon.
Once an option is in the money, tracks closely in underlying stock price. In the money option, the worth is the difference between the strike price and the closer to the underlying asset.
Options Trading Rules
As the owner of an option contract, you have the right to trade the option any time you wish prior to the expiration day. Some investors manage their options in a fashion similar to trading stocks and may buy and sell options frequently as the prices change. Other investors hold onto their options while awaiting a significant market change that makes a specific trade more profitable.
If you had opened an option position to make a profit and the options are almost expiring, it is advisable to close the trade. Most of the time you will be tempted to hold on to the trade on expiration day to get a little more money. If you are at a loss, you may consider closing the option to cut the losses.
Buying call options with a goal of owning the stock when options expire are often counterproductive. You can buy options in making money when the stock price rises. If call options expire in the money, you will end paying a higher price in order to purchase the stock than the initial buying price.
Read More: Can Call Options Be Bought in a Roth IRA?
Expired Options Fate
Although it is up to you when to trade your options, it's important to take note of the expiration date on your options contracts. You can wait to trade your options up until the date of expiration, but options are designed to expire worthless. In some cases, the underlying asset may not have performed as expected, and you may choose to simply let your options expire. If your options have increased in value, however, failure to execute a trade by the expiration date results in an inevitable financial loss.
Trading Before Expiration Day
Many investors recognize the value in trading options prior to the expiration day whenever possible. Option prices are typically more volatile and unpredictable as the expiration approaches. This makes trading close to expiration more risky. Purchasing options with an expiration date further in the future allows you more time to wait out the market's movements and ultimately make a profitable trade well in advance of your option expiration date.
Sara Melone is a mother of three and a graduate of UNH. With prior careers in insurance and finance, photography, as well as certifications in fitness and nutrition, Melone draws directly from past experience and varying interests. She contributes with equal passion to birth journals, investment blogs, and self-help websites.