In Finance, what is an Expiration Time?

Mary McMahon
Mary McMahon

An expiration time is the time of day that an option will expire and someone can no longer exercise it. In many environments, expiration dates and times are set by a calendar and do not change, while in other cases, they can be written into a specific options contract. It is important for people to be aware of the expiration time so that if they intend to exercise an option, they do not lose out.

In a call option, the contract allows someone to buy a set number of units at a set price, known as the strike price.
In a call option, the contract allows someone to buy a set number of units at a set price, known as the strike price.

In an option, people buy the right to have an opportunity to buy or sell a security at a set price at some point in the future. Someone holding a security can opt to sell if that price is higher than the going rate, while someone looking to buy can exercise an option at a price below the going rate. In both cases, a profit is realized on the transaction. Structured into an option is an expiration, to ensure that people use the option within a certain timeframe.

With some exchanges, there is a convention with options such as a rule that they expire on the third Saturday of the expiration month. With all options due in a given month expiring at the same time, it is easy for traders to keep track of their options. In other cases, the contract may include a customized expiration date, depending on the agreement reached by the people involved in the trade. The expiration time is a more specific deadline. If people fail to exercise the option in time, it is terminated.

In some cases, the expiration time falls on the day before the expiration date. People must indicate their plan to exercise on the evening of the previous day to give the trade time to go through. In other cases, it may fall at a time like noon on the expiration date, or fall later in the afternoon. Later times are sometimes used to permit people trading between time zones greater flexibility.

Options are transferable, and people may opt to sell an option before it expires if they are given a good offer. Some exchanges require that any trades take place well before the expiration time, while others allow trades to take place right up until it expires. Once an option expires, the person who holds it has lost the right to exercise it and it has no value. He or she has also forfeited whatever was paid for the contract.

Mary McMahon
Mary McMahon

Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a wiseGEEK researcher and writer. Mary has a liberal arts degree from Goddard College and spends her free time reading, cooking, and exploring the great outdoors.

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