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Options: Expiration Date.
On an option exchange, every 3rd
Friday of the month is expiration day. A number of option series
expire on this day.
At expiration all call options
with a higher strike price than the expiration price of the
underlying stock/currency or index will be worthless. All
series with a lower strike price will have value and will be
exercised. In the case of put options the opposite applies.
For all holders of call options it
will be optimal when the value of the positions at expiration is
as low as possible.
Options expiration date is the
most important factor in calculating an options price:
- The Black Scholes formula is used to price
a European style option by factoring in current stock price,
strike price, time until expiration, level of interest rates,
any dividends and the volatility of the underlying security.
- The binomial model is used to price American
style options. The binomial model calculates a tree of stock
prices for given time intervals within the expiration period of
the option using the volatility of a stock and time to
expiration to find out how much a stock will increase or
decrease in value. This calculation gives all possible prices of
a stock. Then, the option prices of the stock are calculated
backwards, from expiration to present. These prices are obtained
by using risk neutral valuation. Ultimately, we get one price
for the option.
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securities has potential rewards, and it also has potential risks
involved. Trading may not be suitable for all users of this Website.
Analyst research available through this Website does not constitute a
recommendation or a solicitation any particular investor should purchase
or sell any particular securities. Past performance is not necessarily
an indication of future performance. You absolutely must make your own
decisions before acting on any information obtained from this Website.
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