Don't Let Option Expiration Catch You Off Guard

The option expiration is the date when you will no longer have the right to exercise your option on a stock. If you allow a stock option to expire, you will have to hold onto the stock instead of selling it at the price you previously agreed to for the option period. This may sound confusing because it relies on understanding what a stock option is, what an expiration period looks like and how you may miss the date.

What is a Stock Option?

A stock option is a privilege sold by one stockholder to another to take the option of selling or buying a stock at a set price during a certain period of time. For American stocks, an option typically allows the individual to sell or buy at any point during the cycle. European stock options may only be eligible for trade on the actual expiration date.

The most common example of an option facing most casual investors occurs when an employer offers an option to employees as part of a 401k or pension plan. The employees will have the chance to buy or sell company stock at a set price during that period of time. This may occur when an employee is approaching retirement and the company would like the employee to sell the stock back. The employee can do so for an agreed upon price up to a certain period of time even if the actual price of the stock has dropped since the option was offered.

What is a Stock Option Expiration?

A stock option does not continue indefinitely. The person holding the option will have to exercise the privilege before the expiration, which traditionally occurs on the third Friday of a given month. However, the month that the stock option expires on will vary according to the stock. Typically, one type of stock will have the same option expiration date across the board. For example, stock options for Microsoft all expire during the same months each year and do not vary from option to option.

How Do I Watch for Expiration?

There are three main option cycles: January, February and March. Depending on which cycle your stock option is assigned to, you will be able to learn when your option expires. If you know which cycle your stock has been assigned, then you already have narrowed the window of potential expiration dates for the option.

  • January cycles expire in January, April, July and October.
  • February cycles expire in February, May, August and November.
  • Finally, March cycles expire in March, June, September and December.

In order to determine which cycle you are on, add three months to the third month listed for your stock option cycle. The month you arrive at will be your cycle start. For example, if the third option expiration on your stock is December, then three months later is March, and this will be the start of your option cycle. If you miss your expiration date, then you will not have the right to cash in on the option.

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