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Expiration

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Definition of Expiration

Expiration Image 1

Expiration

The time when the option contract ceases to exist (expires).



Related Terms:

Expiration cycle

An expiration cycle relates to the dates on which options on a particular security expire. A
given option will be placed in 1 of 3 cycles, the January cycle, the February cycle, or the March cycle. At any
point in time, an option will have contracts with 4 expiration dates outstanding, 2 in near-term months and 2
in far-term months.


Expiration date

The last day (in the case of American-style) or the only day (in the case of European-style)
on which an option may be exercised. For stock options, this date is the Saturday immediately following the
3rd Friday of the expiration month; however, brokerage firms may set an earlier deadline for notification of
an option holder's intention to exercise. If Friday is a holiday, the last trading day will be the preceding
Thursday.


Time until expiration

The time remaining until a financial contract expires. Also called time to maturity.


American option

An option that may be exercised at any time up to and including the expiration date.
Related: European option


American option

An option that can be exercised any time until its
expiration date. Contrast with European option.



American-style option

An option contract that can be exercised at any time between the date of purchase and
the expiration date. Most exchange-traded options are American style.


Basket options

Packages that involve the exchange of more than two currencies against a base currency at
expiration. The basket option buyer purchases the right, but not the obligation, to receive designated
currencies in exchange for a base currency, either at the prevailing spot market rate or at a prearranged rate of
exchange. A basket option is generally used by multinational corporations with multicurrency cash flows
since it is generally cheaper to buy an option on a basket of currencies than to buy individual options on each
of the currencies that make up the basket.


Expiration Image 2

Black-Scholes model

The first complete mathematical model for pricing
options, developed by Fischer Black and Myron Scholes. It examines market
price, strike price, volatility, time to expiration, and interest rates. It is limited
to only certain kinds of options.


Black-Scholes option-pricing model

A model for pricing call options based on arbitrage arguments that uses
the stock price, the exercise price, the risk-free interest rate, the time to expiration, and the standard deviation
of the stock return.


Call option

An option contract that gives its holder the right (but not the obligation) to purchase a specified
number of shares of the underlying stock at the given strike price, on or before the expiration date of the
contract.
Call premium
Premium in price above the par value of a bond or share of preferred stock that must be paid to
holders to redeem the bond or share of preferred stock before its scheduled maturity date.


Call Option

A contract that gives the holder the right to buy an asset for a
specified price on or before a given expiration (maturity) date


Combination strategy

A strategy in which a put and with the same strike price and expiration are either both
bought or both sold. Related: Straddle


Convergence

The movement of the price of a futures contract toward the price of the underlying cash
commodity. At the start, the contract price is higher because of the time value. But as the contract nears
expiration, the futures price and the cash price converge.


European option

Option that may be exercised only at the expiration date. Related: american option.


European option

An option that can be exercised only on its expiration date.
Contrast with American option.


European-style option

An option contract that can only be exercised on the expiration date.


Expiration Image 3

Options contract

A contract that, in exchange for the option price, gives the option buyer the right, but not
the obligation, to buy (or sell) a financial asset at the exercise price from (or to) the option seller within a
specified time period, or on a specified date (expiration date).


Perpetual warrants

Warrants that have no expiration date.



Put-call parity relationship

The relationship between the price of a put and the price of a call on the same
underlying security with the same expiration date, which prevents arbitrage opportunities. Holding the stock
and buying a put will deliver the exact payoff as buying one call and investing the present value (PV) of the
exercise price. The call value equals C=S+P-PV(k).


Put Option

A contract that gives the holder the right to sell an asset for a
specified price on or before a given expiration (maturity) date


Series

Options: All option contracts of the same class that also have the same unit of trade, expiration date,
and exercise price. Stocks: shares which have common characteristics, such as rights to ownership and voting,
dividends, par value, etc. In the case of many foreign shares, one series may be owned only by citizens of the
country in which the stock is registered.


Straddle

A strategy used in trading options or futures. It involves
simultaneously purchasing put and call options with the same exercise price
and expiration date, and it is most profitable when the price of the underlying
security is very volatile.


Strip, strap

Variants of a straddle. A strip is two puts and one call on a stock, a strap is two calls and one put
on a stock. In both cases, the puts and calls have the same strike price and expiration date.


Theta

Also called time decay, the ratio of the change in an option price to the decrease in time to expiration.


Time premium

Also called time value, the amount by which the option price exceeds its intrinsic value. The
value of an option beyond its current exercise value representing the optionholder's control until expiration,
the risk of the underlying asset, and the riskless return.


Time to maturity

The time remaining until a financial contract expires. Also called time until expiration.


Time value of an option

The portion of an option's premium that is based on the amount of time remaining
until the expiration date of the option contract, and that the underlying components that determine the value of
the option may change during that time. Time value is generally equal to the difference between the premium
and the intrinsic value. Related: in-the-money.


Volatility

A measure of risk based on the standard deviation of investment fund performance over 3 years.
Scale is 1-9; higher rating indicates higher risk. Also, the standard deviation of changes in the logarithm of an
asset price, expressed as a yearly rate. Also, volatility is a variable that appears in option pricing formulas. In
the option pricing formula, it denotes the volatility of the underlying asset return from now to the expiration
of the option.
Std Deviation = Rating
up to 7.99 = 1
8.00-10.99 = 2
11.00-13.99 = 3
14.00-16.99 = 4
17.00-19.99 = 5
20.00-22.99 = 6
23.00-25.99 = 7
26.00-28.99 = 8
29.00 and up = 9




 

 

 

 

 

 

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