Call options are contracts that give the option holder the right to purchase the underlying stock or other security at a specific price. Every option contract has a specific expiration date by which the contract must be exercised or allowed to expire. Options have standardized expiration dates, and all call options on stocks for a specific month will expire at the same time.
Call options are listed with an expiration in a specific month. Each stock with options trading against it will have call options listed on at least a quarterly basis. Some stocks start the quarterly turn in January, followed by April, July and October. Other stocks will start the cycle in February and others in March. Most stocks will also have an option contract listed for the next calendar month. For example, if a stock has option trading on the February, May, August, November cycle, after the May contract expires, options will start trading for the June expiration. Stocks with active option trading can have expirations every month.
The expiration date for call options on stocks is the Saturday following the third Friday of the expiration month. This means that the third Friday of the month is the last day to trade the options with expiration in the month. Option trading will be available until the stock market closes on that Friday. If the third Friday of the month is a holiday, the last day of trading is on Thursday.
Call options have a strike price, which is the price an option holder will pay for the underlying stock if the trader elects to exercise the contract. If the share price of the stock is below the strike price of the call option, the option is said to be out-of-the-money. If the share price is above the call option strike price, the option is classified as in-the-money. If a call option is OTM at expiration, the option will expire worthless.
A call option that reaches the expiration date and is ITM will be automatically exercised. A trader who holds a call option that is ITM when the market closes on Friday will own the underlying stock in her account when the market opens on Friday. The trader must have enough money in the account to pay for stock. The trader who sold the call option must have the shares in his account to deliver to the option holder. If he does not have shares in the account, his broker will buy the shares on the open market when it opens on Monday and charge the cost to the trader's account.
Option traders should monitor their open option positions and the value of the underlying stock closely on the Friday expiration date. A rapid stock price change near the end of the trading day can move a call option from OTM to ITM, resulting in an automatic exercise. Traders can elect to close an OTM position before expiration to avoid a last-minute surprise. Call option holders can close a position by selling the call option contracts. The option seller can buy back the sold contracts.
Tim Plaehn has been writing financial, investment and trading articles and blogs since 2007. His work has appeared online at Seeking Alpha, Marketwatch.com and various other websites. Plaehn has a bachelor's degree in mathematics from the U.S. Air Force Academy.