Learn the Right Option Expiration for Your Trade

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Learn the Right Option Expiration for Your Trade

The Expiration is the moment that a trade is closed, and the results of the trade are fixed. The periods selected influence the duration of the trade. Learn that every strategy is only capable of generating forecasts within specific periods of time, expiration parameters are key. This is especially true when trading with Turbo options. There, every minute could be the decisive one in regards to the final outcome of the trade. In this article, we will go through everything that affects expirations and provides you a comprehensive answer to the question of how to choose the right trade duration.

Definition

At the start of the article, we already defined the term, it is the moment a trade is closed. However, it is worth a few more moments of consideration. In part, trade duration can be measured in specific time units, for example, the unit of 1-minute functions as an indicator of what time to leave the market. In this first case, the time of an option is always fixed, right down to the exact second. If the point of expiration is shown by minutes (15:30 for example), not by duration, then the actual duration of the trade varies based on when the trade was entered.

This working framework is implemented on the trading terminal Binomo. Therefore, there, actual Turbo-option trade duration fluctuates from 30 to 90 seconds. If you enter the market at 12:15:25 with a trade for 1 minute, then the soonest point of expiration will be 12:16:00, meaning that the actual operation duration is 35 seconds. Traders must learn this moment when trading. For convenience on the terminal when selecting a specific expiration, there is a vertical line on the chart that signifies the finish.

Classic Option Types and Their Duration

Traders have various different approaches to this process given the wide array of trading periods. The majority of users, especially beginners, prefer minimal timeframes, with periods up to 5 minutes. More conservative traders usually trade in hourly intervals, or within the confines of one day. Some companies, aimed at professionals, allow trades to be held for several months. This approach enables profiting from long-term trades, up to a year.

Trade Duration Based on Option Type:

• Turbo — from 30 seconds to 300 (1–5 minutes);

• Classic (binary options) — from 5 minutes to the end of that trading day;

• Long-Term — up to 12 months.

These periods are listed on trading platforms and web terminals. However, among traders, they are categorized slightly differently. There are 4 categories, ultra-fast (scalping), short-term, medium-term and long-term. Let’s look into these in further detail.

1. Ultra-Fast. Scalping is when you place a large number of trades over a short period of time. Traders are called scalpers when they trade Turbo options with durations from 1 to 5 minutes. The term was coined by Forex traders. However, it is sometimes applied to trading with options as well, but more rarely, due to several fundamental differences in the trading process. For instance, the total profit isn’t dependent on price behavior, either it the profit will the pre-established amount, or there will be a 100% loss. There is no middle ground.

2. Short-Term. This is the most popular trading approach to trade duration. Every trading operation runs on average from 15-16 minutes to several hours. The defining difference is that positions are never carried into the following day and are always closed by the end of that trading session.

3. Medium-Term. This trading approach is when trades are opened for weeks, and more rarely, up to one calendar month. This framework enables you to catch persistent tendencies that last for more than a 24 hour period.

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4. Long-Term. Long-term market operations are advantageous for experienced traders. Long-term trading not only requires a high level of professionalism but also great restraint and patience. Rightly so, when generating a forecast over a long period, traders focus on fundamental market analysis, as opposed to technical analysis. No further commission is required when trades carry over into the following working day. This is one of the main advantages of trading with binary options versus Forex. Professionals have an appreciation for that.

Choosing the Right Expiration Period

Trade operation duration, the time present on the market, is one of the key factors in any trading strategy. This doesn’t pose a challenge for experienced traders, as they have already worked out their own style and abide by it, with small adjustments based on whatever situation is at hand. However, this question is a pertinent one for beginners. A mistake of this persuasion can diminish the effectiveness of a strategy and the general trading result. So, when selecting a period of expiration for options it is necessary to take several nuances into account.

Nuance №1 — Timeframe. The time chart interval, where technical analysis is conducted and forecasts are built, is a factor of key importance. The timeframe and expiration are directly connected. The higher the interval is on the chart the longer the duration of the trade. A trading operation cannot run for less time than one candle. Therefore, more often traders are not measuring this indicator as a specific time, but in bars (one price formation on the chart). This approach is applicable to any universal strategy that is suitable for traders in various conditions.

The standard ranges from 2 to 5 candles. For example, if the chart is set up on a minute interval, then the best option for traders would be to use Turbo options with an expiration up to 300 seconds. However, there are quite a few strategies that allow you to forecast the next 10–20 bars. Therefore, in regards to this question, there is no universal answer. Beginners to fully familiarize themselves with the rules of specific trading systems and strictly abide by them. With experience, you’ll develop a “gut” instinct that will enable you to evaluate trade signals regarding the duration of the forthcoming price movement on your own.

Nuance №2 — Indicator Period Settings. This refers not to the chart, but the indicators used. The majority of analysis tools based on the Moving Average have period settings. It has an influence on the number of historical price formations that count when calculating the expected indicator. The longer the period, the more stable the signals, although the time-lag increases as well. If the period is decreased, the opposite situation arises. The delay is nearly eliminated, however, there is a sharp increase in sensitivity. Therefore, the Moving Average starts to react to any chaotic jump in price, that may or may not reflect the real picture of what is going on.

Practical advice for tackling this nuance is as follows. Beginners must carefully study the strategy rules. If a decision is taken in regards to this question independently, then, where applicable, abide by the following points. Firstly, follow visually to evaluate the chart with the specified indicators. Produce an evaluation of the signals based on historical data, their duration. The character of indicator regulation is defined by price behavior. With the in mind, the optimal average value is selected, in respect to the statistic ratio between profitable and losing trades. Secondly, every concrete signal must be evaluated separately when defining potential future movement. This skill is difficult to put into words since it comes to every trader as they gain experience.

Nuance №3 — Levels of Support and Resistance. This is more applicable to specific strategies, although it keys when deciding the period of expiration. The issue is that the price behavior moves within the channel, reflecting off or breaking through the level. On the approach to the next support or resistance line, in nearly 70% of the cases, the market unfolds in the opposite direction. In 3 out of 10 cases, the level is broken through after the price falls within the frame of the other channel. In any case, independent of market conditions, it is always possible to identify the support and resistance on the chart. When trades are running, they are often positioned at an equal distance, parallel to one another, creating a channel from the two lines.

The practical resolution to the aforementioned information is as follows. When selecting a period of expiration, traders must evaluate what the distance to the nearest level is. Simultaneously, asses the indicator volatility to better construct an approximation of how quickly the resistance point will be reached. For example, if the price is roughly in the middle of the corridor, yet, at the same time the trading signal has appeared, then select the appropriate option duration so that the trade will close prior to reaching that level. As there is a good chance that the collision of the price with the support and resistance lines will lead to a trend reversal, and that can hinder profit in its own right.

Nuance в„–4 — Economic Calendar News Releases. This nuance is more applicable for traders who prefer day trading. The issue is that when key, highly anticipated events take place, the market situation changes. Often, the release of news is accompanied with sharp asset course fluctuations. Whereas the majority of times in this situation, it isn’t possible to predict the path using standard methods of technical analysis. However, it is quite easy to predict when taking the economic calendar into account. It is easy to do so if you use Investing.com’s Economic Calendar as a reference.

Practical advice on this point is simple. Make sure that your trades don’t expire at times when important news is released. The only ones worth planning around are those in the Economic Calendar that have two, or especially three “bullheads”. If there will be important news released that trading day, we strongly recommend you to hold off trading the hour before and after the event. However, that is only applicable to traders using technical analysis strategies. If we are talking about a fundamental approach to generating forecasts, the opposite is true. Important news releases are rare opportunities that practically guarantee to profit from trades. A literate approach to trading the news produces amazing results.

Conclusion

In this article, we went through all the key points that beginners should know regarding how to choose the right trade duration. If we were to summarize the information above and draw conclusions, then we would say the following. Trades should choose trading duration periods so that it fits with the conditional period of signal duration.

The forecasting period (“the window to the future”) is strictly limited, for example, for the second or minute time frames, the period is around 1–5 minutes. Keep in mind that those periods of expiration specifically are recommended for beginners, as well as following the rules of trading system you selected. Although it is vital to regulate it yourself if you are not following a pre-prepared strategy, but one of your own device. It comes with practice.

“General Risk Warning: Binary options and cryptocurrency trading carry a high level of risk and can result in the loss of all your funds.”

Options Expiration | Everything You Need To Know

“Expiration” is a term that you will not hear a stock trader utter…why? Because when you own shares of stock, that ownership never expires (unless you choose to sell your shares of stock).

So why do options expire?

Unlike purchasing shares of stock, purchasing an option contract is generally used as a shorter-mid term investment. When you buy or sell an option contract (controlling 100 shares of stock), you must agree to an expiration date, as part of that contract.

As the buyer or seller of an option, you can choose which expiration cycle you would like to invest in. For most stock options, there are typically quarterly cycles, monthly cycles, and weekly cycles.

It is not vital to learn why expiration cycles occur in the weeks/months that they do (although we will touch on this a little bit in this post), but rather what is more important is understanding what expiration is and how to choose an expiration date because it becomes pivotal in determining whether or not a trade was a success or failure.

What Is An Expiration Cycle? A Brief History

Expiration cycles can be kind of confusing, so I’m going to do my best to break it down. 1973 is the year that the Chicago Board Options Exchange (CBOE) first started to allow equity trading. When they began, it was decided that when options are traded, there would be a total of four different months that each individual equity option could be traded during, each on a different cycle.

The CBOE in 1973

The typical increments for these options were 3 months, 6 months, 9 months, and 1 year. Typical cycles for an option would look something like this:

  1. January expiration, April expiration, July expiration, October expiration
  2. February expiration, May expiration, August expiration, November expiration
  3. March expiration, June expiration, September expiration, December expiration

Expiration Cycles Change – More Cycles!

Options gained popularity through the 70s and 80s as a way for investors to hedge their stock positions in the shorter term. As a result of this, in 1990 the CBOE made a change to the rules so that every stock option would have an expiration cycle in the nearest two months.

From then on, all equity options would have what was deemed a ‘front month’ (the closest month – generally the current month) and a ‘back month’ (the month proceeding the front month), which made the expiration cycles only slightly more complex.

Another development to expiration cycles spawning from the rising popularity of options in the 90s was the birth of a new type security, called LEAPS.

Long Term Equity Anticipation Security – Even More Cycles!

Long Term Equity Anticipation Security (LEAPS) were introduced as a way to make longer-term investments in stock options (things like indices did not have LEAPS until more recently).

So how long can an option contract actually be with LEAPS?

A LEAPS can expire up to 3 years from the current expiration cycle date, making the option as an instrument, a viable longer-term trading strategy for investors (I use ‘longer’ loosely because its very subjective and based on an investor’s trading style – i.e. for a day trader, 3 years would be an eternity, but for a buy and hold style trader, it’s short-term). LEAPS added on additional expiration cycles to underlyings, extending the investing calendar from 1 to 3 years.

Where does that leave us?

After LEAPS were introduced, expiration cycles got quite a bit more complex. Like previously mentioned, it’s not necessary for you to understand the ins and outs of why expiration cycles occur at the frequency/times they occur at. With trading softwares, it’s no longer necessary to memorize or understand why certain underlyings have certain expiration cycles and other don’t. What’s most important is understanding what expiration cycle choices you have to make.

If you do want to know more about how the cycles currently work after to the addition of front month/back month and LEAPs cycles, investopedia does a great job breaking it down here.

Why Is Options Expiration So Important?

In the most basic sense, expiration is important because it sets a timeframe for your trade. Whether or not a trade is going in the right direction and how much time left until that option expires define what profit or loss you will incur as an investor.

This chart shows how time decay (theta) impacts the price of an option.

How many days you have left until an option expires is called days to expiration (DTE). During the time between the placement of the trade and the expiration date, a variable called theta (time decay), will determine if your trade is profitable or not. As the amount of time until your option expires – theta decay – decreases, this is favorable to the seller of the option, and not the buyer.

One last reason expiration is so important is due to its relation with stock assignment.

One fear that keeps some traders from placing their first options trade is the fear of being assigned stock (especially if you have a smaller account with funds less than that of what 100 shares of a stock would cost). Don’t let this fear stop you from placing your first options trade. It’s not that scary, I promise!

If you sell an option (naked or as part of another strategy – i.e. Iron condor) and that option is in the money when the option expires, you will be assigned stock. If you buy an option, you will never automatically be assigned stock. As the buyer, you always have the right, but not the obligation, to purchase the stock via the option you invested in.

How To Choose An Expiration Date

Choosing an expiration can be difficult, so here are some things to keep in mind when choosing an expiration date.

When picking an expiration date, your trading style should guide what expiration you choose. For example, if you day trade, you will probably always use the nearest expiration cycle. A premium seller may want to go farther out and find an expiration cycles with about 25-50 days to expiration, while someone who does technical analysis may adjust their DTE according to what their charts are telling them (which can vary from underlying to underlying).

Are you a premium seller (someone who sells options to collect premium)? tastytrade has done a ton of research into the mechanics of selling premium. After countless studies, the research team has found that you stand the best chance of profiting when you sell options with 25-50 days to expiration.

As mentioned before, most stock options have weekly, monthly, and quarterly cycles. Something to keep in mind when choosing an expiration date is what cycle the option is in, as this can have an impact on how liquid the underlying is. Weekly cycles tend to be less liquid than monthly/quarterly, so you may have a little trouble getting out of a trade in a weekly expiration cycle. Always keep liquidity in mind when choosing an expiration.

That may leave you wondering: why would you choose to invest in the weekly expirations if those options are generally more illiquid than monthly expirations?

There are several answers to that question, but the most popular are that weekly expirations would fit better in your strategy (if you invest in options that are between 1-10 trading DTE, then weekly expirations would provide you more opportunities to invest) and weekly expiration cycles are commonly used for earnings trades.

Earnings are another important consideration when determining an expiration date (along with dividends for similar reason). Earnings are a binary event, meaning that one of two outcomes can occur. the price can go up or down after earnings are announced and many times, earnings cause large swings in an underlying’s price and there is a corresponding ‘crush’ in the options volatility.

If you put a position on and there are earnings before that position expires, beware of the possibility of the changes in price caused by the earnings announcement. The amount that an underlying may go up/down after an earnings announcement is called the expected move. What the expected move does is quantify the potential move using statistics and historical data, ultimately giving you a price range that the underlying is expected to stay between.

Understanding Expirations On tastyworks’ Trade Page

Understanding the concept of expiration is one thing, knowing how to decipher it within a trading platform can be a whole new ballgame (due to shorthand terminology).

Anytime you set up a trade on tastyworks, you will need to pick an expiration cycle. One of easiest ways to do this is using the expiration buttons on the trade page pictured below.

Expiration Date (Derivatives)

What Is an Expiration Date? (Derivatives)

An expiration date in derivatives is the last day that derivative contracts, such as options or futures, are valid. On or before this day, investors will have already decided what to do with their expiring position.

Before an option expires, its owners can choose to exercise the option, close the position to realize their profit or loss, or let the contract expire worthless.

Key Takeaways

  • Expiration date for derivatives is the final date on which the derivative is valid. After that time, the contract has expired.
  • Depending on the type of derivative, the expiration date can result in different outcomes.
  • Option owners can choose to exercise the option (and realize profits or losses) or let it expire worthless.
  • Futures contract owners can choose to roll over the contract to a future date or close their position and take delivery of the asset or commodity.

Basics of Expiration Dates

Expiration dates, and what they represent, vary based on the derivative being traded. The expiration date for listed stock options in the United States is normally the third Friday of the contract month or the month that the contract expires. On months that the Friday falls on a holiday, the expiration date is on the Thursday immediately before the third Friday. Once an options or futures contract passes its expiration date, the contract is invalid. The last day to trade equity options is the Friday prior to expiry. Therefore, traders must decide what to do with their options by this last trading day.

Some options have an automatic exercise provision. These options are automatically exercised if they are in the money (OTM) at the time of expiry. If a trader doesn’t want the option to be exercised, they must close out or roll the position by the last trading day.

Index options also expire on the third Friday of the month, and this is also the last trading day for American style index options. For European style index options, the last trading is typically the day before expiration.

Expiration and Option Value

In general, the longer a stock has to expiration, the more time it has to reach its strike price and thus the more time value it has.

There are two types of options, calls and puts. Calls give the holder the right, but not the obligation, to buy a stock if it reaches a certain strike price by the expiration date. Puts give the holder the right, but not the obligation, to sell a stock if it reaches a certain strike price by the expiration date.

This is why the expiration date is so important to options traders. The concept of time is at the heart of what gives options their value. After the put or call expires, time value does not exist. In other words, once the derivative expires the investor does not retain any rights that go along with owning the call or put.

Important

The expiration time of an options contract is the date and time when it is rendered null and void. It is more specific than the expiration date and should not be confused with the last time to trade that option.

Expiration and Futures Value

Futures are different than options in that even an out of the money futures contract (losing position) holds value after expiry. For example, an oil contract represents barrels of oil. If a trader holds that contract until expiry, it is because they either want to buy (they bought the contract) or sell (they sold the contract) the oil that the contract represents. Therefore, the futures contract does not expire worthless, and the parties involved are liable to each other to fulfill their end of the contract. Those that don’t want to liable to fulfill contract must roll or close their positions on or before the last trading day.

Futures traders holding the expiring contract must close it on or before expiration, often called the “final trading day,” to realize their profit or loss. Alternatively, they can hold the contract and ask their broker to buy/sell the underlying asset that the contract represents. Retail traders don’t typically do this, but businesses do. For example, an oil producer using futures contracts to sell oil can choose to sell their tanker. Futures traders can also “roll” their position. This is a closing of their current trade, and an immediate reinstitution of the trade in a contract that is further out from expiry.

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