1. Option Expiration
The expiration date is the last day on which an option can be exercised or traded. After this date, the option becomes invalid. Options can expire on various dates, but the most common expiration is the third Friday of the month for standard options.
- Early Exercise: Some options may be exercised before the expiration date, but most traders close out positions or let options expire worthless if they are not beneficial.
- Out of the Money: If the option is not profitable by the expiration date, it expires worthless, and the trader loses the premium paid for the option.
2. Strike Price
The strike price is the price at which the underlying asset can be bought or sold when the option is exercised. The strike price plays a critical role in determining whether an option is profitable.
- For Call Options: The option is profitable if the underlying asset’s market price rises above the strike price (in the money).
- For Put Options: The option is profitable if the market price falls below the strike price (in the money).
3. Relationship Between Expiration and Strike Price
The value of an option depends on both its strike price relative to the underlying asset’s market price and the time remaining until expiration.
- In the Money (ITM): The option has intrinsic value.
- Out of the Money (OTM): The option has no intrinsic value, only time value.
- At the Money (ATM): The strike price is equal to or very close to the market price.
Understanding expiration and strike price helps traders evaluate the potential profitability of an option and make strategic decisions about exercising, selling, or letting the option expire.