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Options Expiration Explained - Options Adjustments - Options Mechanics - YouTube
Channel: Option Alpha
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Hey everyone.
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This is Kirk, here again at optionalpha.com.
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And in this video tutorial, we’re going
to be talking about options expiration, just
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what is it and some tips, pointers, tricks,
stuff like that to get you through options
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expiration successfully and profitably.
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Options expiration: We all know or now you
know that all options have a limited useful
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lifespan and every option contract is defined
by an expiration month.
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Options are finite in that they have a limited
life.
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They end and just like the contract says,
there’s a beginning date and an ending date.
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Now, this is different than traditional stock
because stock really doesn't have an ending
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date.
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There’s no time period when you have to
turn into your stock for money.
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With options, there is a defined expiration
date that you either have to exercise the
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contract or reverse your order and sell it
back to the market.
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The option expiration date is the date in
which options become invalid and the right
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to exercise is no longer there.
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There's two types of options when we talk
about expiration.
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There’s going to be American style options
and then European style options.
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For American style options, the contract’s
last trading day is generally the third Friday
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after expiration unless that day is a holiday
in which case it is the previous day.
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The big difference in American style option
contracts is that you can actually exercise
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any of your contracts at any point up until
expiration.
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You can turn that call contract into long
shares in the underlying stock at any point
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up until expiration.
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Now, when we talk about European style options,
you can only exercise your option at the expiration
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date, so it’s usually the day before they
actually really expire.
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For European style options, the last trading
day will be the business day, generally a
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Thursday preceding the day on which exercise
settlement value is calculated which is usually
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the third Friday of the month.
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Again, with European style options, it’s
not that you can’t get out of the trade.
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That's a big misconception.
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Some people think that with European style
options, you can’t get out of the trade.
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That’s not the case.
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But what they’re generally saying here is
that with European style options, you can
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only convert the option into stock on the
last day in which you can do that, so generally,
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a Thursday preceding the day of expiration.
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As always, with our membership, we have a
very helpful and useful expiration calendar
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in the membership area.
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This goes out almost four years in advance
at all time.
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As soon as the exchanges published the new
calendar, we’ll immediately have that calendar
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updated.
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But it's really good because it helps you
not only identify the holidays to count in
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your trading cycle, but also the expiration
days and also when the options stop trading.
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Most people always get confused, they say,
“Well, I thought options expired on Saturday?”
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But they don’t know that they stopped trading
and there’s no point in selling them back
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that Friday.
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That's really key.
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You should really know when exactly your options
expire or when they stop trading.
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And then also, our calendar has the quarterly
expiration as well, so very, very helpful.
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There's a couple of things that are just underlying
factors in options expiration that I want
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to go over.
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One is expiration cycles.
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This is really something that you'll get into
if you get into more of advanced and high
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level trading.
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But as you know that the year is broken down
into four quarters and within each of those
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quarters, there’s three months.
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There’s actually different ways to describe
different expiration cycles in the contracts
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you want to trade.
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In the first cycle, we have what's called
the JAJO cycle and those expiration months
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are the first month of each quarter, January,
April, July, October.
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Then we have the second cycle which is the
FMAN which are the expiration months, February,
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May, August and November which are the second
months in the cycle.
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And then we have expiration months for the
third cycle which are the third month in the
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cycle and those are MJSD, March, June, September
and December.
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For example, I could tell someone that I want
to trade the second quarter, second cycle
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options.
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Those will be the options that are located
in here in May.
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These would be the second cycle or second
quarter of the year and then also the second
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month in that cycle.
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That's how we will quickly identify those
contract months.
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Just some information and tidbits, some tips
and tricks and useful stuff here: I bet you
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didn’t know that most people believe 90%
of options expire worthless.
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That is widely held as true.
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However, this is untrue.
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Normally, about 30% of options expire completely
worthless in each cycle or in each monthly
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expiration period.
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Only about 10% of the options are actually
exercised before the monthly cycle, usually
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in the final week before expiration.
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I get a lot of questions from members and
from clients saying, “Well, what’s the
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risk that any of the strategies that I trade
will actually be exercised?”
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And you can see that only about 10% of options
are actually exercised, meaning that they’re
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converted from the option itself to the underlying
stock.
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And usually, that happens in the final week,
so that's the main time that you have any
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risk of being exercised.
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But here's the key here with this, is that
60% of all options traded in the marketplace
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are traded out of the market before expiration.
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This means that buyers sell their options
back to the market and writers buy positions
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back at the close.
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Really, a lot of traders will net out their
positions by just reversing the order.
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And that’s generally what happens in the
marketplace.
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Again, these are really important key numbers
that I think you should know and understand.
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It really will help you get over the fear
factor of doing some strategies if you know
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some of the things that I’ve presented here.
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As always, I hope you guys enjoyed this video.
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You can always share this video right below
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