- The Basics of options expiration
- The frequency of options expiration
- Why European style options are best for 0-DTE
- Options assignment risk
In the world of financial markets there are different security types, like stocks and bonds and futures. Many of these securities are contracts, they are created and exist for a period of time, then they expire. An example of this are options contracts.
During the time an options contract is active, it has a time value, that value is called the premium. As the expiration date nears, the value of that premium decreases until it is completely gone. The rate at which it decreases in value, is exponential. In other words, as you get closer and closer to expiration, the premium value decreases faster and faster.
There are two parties involved in every options contract, there is the creator, also called the writer, who is said to be short the contract. And there is the owner or buyer, who is said to be long the contract. At expiration time the writer of the contract has certain obligations, and the buyer has certain rights that they can choose to exercise, which the writer must fulfill due to their obligation.
When the expiration day comes, the buyer, or the person who is long the contract, decides whether to exercise the terms of the contract or let it expire worthless.
Frequency of Expiration Dates
In the United States there are standardized options contracts that expire at different times. There are monthly options, that expire on the Saturday following the 3rd Friday of a month. If Friday falls on a holiday, then the expiration date is moved up one day.
Weekly options are like monthly options in every respect, except they only exist for 8 days. They are introduced each Thursday, and they expire 8 days later on Friday with adjustments for holidays.
S&P futures, along with S&P and VIX Indexes, have options that expire every day of the week. They are like weekly options, in that they are created 8 days prior to expiration. And they expire 8 days later, every day of the week.
These short term options have become so popular, that they make up nearly 50% of all U.S. options trading volume. I know, crazy right?
These are the options that us traders, at 0-DTE.com, are most interested in. They provide us with incredible strategic advantages, specific to the final day of expiration, 5 days a week.
European vs. American Options
American style options can be exercised at any time. This is fine for stocks with monthly or weekly expirations, but the short time frames of daily expirations simply wouldn’t work, so those options contracts use European style expirations, where they can’t be exercised until they expire. This makes holding options right up until the time of expiration, without fear of being exercised a viable strategy, and there’s plenty of premium left, even down to the final minutes in the life of the contract.
The S&P futures have assignment risk after expiration, where options on the S&P index have no such risk, as they are cash settled. This requires the trader to take this into consideration and be prepared to handle the possibility of managing assignment of futures contracts if they trade the S&P E-mini futures into expiration. Either that, or they simply close their trade prior to expiration.
With the S&P Index, there is no such risk, because there is no assignment, because they are cash settled. So, there’s nothing to do if you hold the contract into expiration. Your broker will simply debit or credit your account after the contract has settled.