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Option Expiration - Options Mechanics - Options Trading For Beginners - YouTube
Channel: Option Alpha
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Hey everyone.
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This is Kirk here again, back at optionalpha.com.
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And in this video, Iâm going to go over
option expiration.
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What is option expiration?
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You hear about it all the time and simply
going back to our RBâs combo coupon example,
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it is the last day to close or exercise your
options contract.
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Thatâs what it means.
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Just like anything else, it expires, it runs
out, the time is done, itâs the last day.
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Itâs the option expiration day that you
have the last chance to do something with
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your contract.
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Now typically, youâre going to enter positions
with different expiration months in varying
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dates, but itâs always important to know
when that expiration date is.
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Now again, in this example with our RBâs
roast beef combo because I love RBâs, you
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may not be able to see it in this particular
video, but you can see right down here that
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the expiration date is 4/30/2009, so this
is an old coupon obviously.
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But you can see that this coupon expires on
April 30th.
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Just like an options contract, the coupon
is very similar.
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You have the choice to buy this RBâs roast
beef combo for 399 before April 30th and thatâs
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just like an expiration day.
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If you had an option, you have the choice
to buy stock in Apple for example before the
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April expiration date, whenever that is.
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Itâs the same type of mentality and thinking
that goes into a coupon as with an option.
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Hopefully that makes it a little bit simpler
for everything.
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Another Apple stock example: What I did here
is take a chart of Apple just recently and
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I cut it off and then I drew all these vertical
green lines.
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These green lines represent the expiration
dates for Apple contracts in the future, so
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they can be varying dates for expiration.
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This green line right here where my cursor
is, is the November expiration, the next one
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is December and the next one is January.
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Really, you want to consider these the make-it-or-break-it
points.
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If you buy an option contract for December
expiration which is this middle green line
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here, then that's the point at which either
the underlying stock is going to move far
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enough for you to make a profit or itâs
not and youâre going to have to make a decision
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whether you want to get rid of that contract
or whether you want to exercise it, whatever
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the case may be.
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Now, remember that you can actually get rid
of your options contract by reversing the
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order.
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And we've gone over those in different video
tutorials.
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But you can reverse the order for that options
contract and get rid of it before expiration.
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You donât necessarily have to wait until
expiration to make a decision.
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As always, with our membership, we have the
expiration calendar thatâs right inside
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of our membership area.
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Itâs always updated.
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In fact, we have it always out for the next
three years.
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In case youâre trading some of those longer
term options, you know exactly when those
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dates are.
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But this calendar is really helpful because
it always gives the holiday periods which
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are in orange, the options stop trading day
which is the Friday before expiration and
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then the expiration day for options and also
quarterly expiration which isnât on this
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particular cutoff for the graph, but is on
the other ones.
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Some expiration day and expiration in general
tips: Expiration day for equity and index
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options is the Saturday immediately following
the third Friday of the expiration month.
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If you go back here, you can see that the
Saturday is the options expiration day and
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itâs following the third Friday of every
month.
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In February 1, 2, 3, thereâs the third Friday,
expiration is that Saturday.
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For American style index option contracts,
the last trading day is generally the third
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Friday of expiration month unless that day
is an exchange holiday in which case, the
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last trading day will be the previous day
or Thursday.
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This is a really important one to watch out
for.
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For instance, if Christmas or Thanksgiving
or something is on the third Friday or it
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just happens to be a holiday on that third
Friday, then itâs actually going to move
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to the previous day.
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You just want to be aware of that as youâre
always trading.
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Know when expiration is, so you donât get
caught on your heels.
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Continuing on here with your expiration tips:
For European style index optionsâŠ
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And weâve covered the differences between
those two in other video tutorials more in
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depth, but weâll touch on it here as well.
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But for European style index option contracts,
the last trading day will be the business
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day, generally Thursday, preceding the day
on which exercise settlement value is calculated.
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I know thatâs a lot, but keep rereading
it.
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For an American style index option, they can
exercise these any time prior to expiration.
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Now, the keyword here is âexercise.â
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That means youâre actually going to convert
the option from an option to the physical
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underlying stock or ETF or whatever the case
is.
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Thatâs the keyword.
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Most people get confused in saying that American
style versus European that you canât close
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out of your trade until expiration.
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That's not the case.
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You can always reverse your trade and sell
it back to the market or buy it back from
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the market.
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The key here between American and European
is that you cannot exercise Europeans until
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a specific time prior to expiration.
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With American style options which is generally
what we trade here, these can be exercised
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at any time prior to expiration.
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If your expiration is 30 days away, you can
right now convert it to stock and buy that
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stock.
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Again, a European style index option may only
be exercised during a specific period of time
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prior to expiration.
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Now generally, this is the last Friday prior
to expiration day.
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Thatâs the last Friday prior to that Saturday
when they actually expire.
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As always, I hope you guys enjoyed this video.
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