The term expiration date refers to the final day the holder of an option contract can exercise their right under the agreement. After the expiration date, the seller of an option can no longer be assigned.
Explanation
Also known as the expiry date, the expiration date is the last day the holder of an option can exercise their right to buy or sell the underlying asset or trade the contract. For example, if the holder of an option does not exercise their right prior to the expiration date, the contract will expire and no longer have any value.
An American-style option can be exercised at any time before its expiration date. Generally, monthly American options expire on the third Saturday of the month and are closed for trading on the preceding Friday. The exception to this rule occurs if the first day of the month falls on a Saturday. If so, then the expiration date will be the third Friday of the month.
A European-style option can only be exercised on a certain day before its expiration date; typically, this occurs at maturity. Generally, monthly European options expire on the Friday prior to the third Saturday of the month and are closed for trading on the preceding Thursday.
The expiration date is also an important variable when determining an option’s premium. Delta is the rate of change in the theoretical premium paid or received for an option for every unit change in the price of the underlying asset. The delta for an in-the-money call option will approach 1.00 as the option approaches its expiration date, while the delta for an in-the-money put option will approach -1.00 as the option approaches its expiration date.
The term hedge ratio refers to a mathematical formula that compares the value of a hedge to the value of the position in an asset. Calculating and tracking hedge ratios allows investors to understand and control their exposure to the price volatility of various assets.
The term hedge refers to a strategy that establishes a new position in an asset to protect the profitability of an existing position. While a hedge can be used to control risk, and lower a potential loss, that same hedge will also reduce potential gains.
The term gamma refers to the rate of change in delta for a one point change in the price of an underlying asset. An option's gamma is typically expressed in terms of a percentage change in delta for a one-point change in the underlying asset's price.
The term fungibility refers to the interchangeability of assets due to standardization. Trading and exchange of an asset is simplified if it possesses the characteristic of fungibility.
The term expiration Friday refers to the last business day an option can be sold, purchased, or exercised before it expires. Expiration Friday occurs each quarter, and is characterized by higher than normal price volatility and trading volumes.
The term exercise by exception refers to the automatic exercise of in-the-money options at expiration. The Options Clearing Corporation (OCC) institutes exercise by exception unless explicit instructions prohibit exercising the option.
The term European option refers to an agreement that can be exercised only on a specific day prior to its expiration date. Call or put options involving stock market indexes are typically European-style options.
The term American option refers to an agreement that can be exercised at any time prior to, and including, its expiration date. Call or put options involving equities or common stock are typically American-style options.