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 expiration day.
An option is a contract which 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 as noted by investor educator, The Options Industry Council. 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.
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.
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, according to investment website, Trade Stock Option. 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.