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.
Explanation
The expiration date for United States listed stock options, stock index futures, and stock index options is always the Saturday following the third Friday of the month. The preceding Friday, which is the last business day before expiration, is the last day these options can be sold, purchased or exercised. If that Friday happens to be a stock market holiday, then the last trading date would be Thursday.
Expiration Friday is the third Friday on the last month each quarter. Since investors oftentimes close out their positions on expiration Friday, or the trading days immediately preceding it, the market typically experiences a period of increased price volatility and higher-than-normal trading volumes. If the option is in-the-money on expiration Friday, the Options Clearing Corporation (OCC) will institute exercise by exception unless explicit instruction prohibits exercising the agreement. This ensures the holder of the option receives the intrinsic value of the contract.
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 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.
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.