What is Expiration Date?
The expiration date is the final date on which an options contract is valid. After this date, the option can no longer be exercised and becomes worthless. The expiration date, along with strike price and underlying asset, is one of the fundamental parameters defining an options contract.
Expiration and Option Value
As expiration approaches, an option's time value decays. This decay, measured by the Greek theta, accelerates as expiration nears. Options that are out-of-the-money at expiration expire worthless, while in-the-money options retain their intrinsic value.
The time remaining until expiration significantly affects option prices. Longer-dated options are more expensive because they have more time for the underlying to move favorably. Shorter-dated options are cheaper but have less time for price movement.
Expiration Cycles
Traditional options markets use standardized expiration cycles, often monthly or quarterly. Crypto options markets typically offer more frequent expirations, including daily, weekly, and monthly options.
Deribit, the largest crypto options exchange, offers daily, weekly, monthly, and quarterly expirations. DeFi protocols vary in their expiration offerings, with some providing weekly epochs and others offering more flexible terms.
Exercise and Settlement at Expiration
At expiration, in-the-money options are typically exercised automatically. Settlement can be physical involving actual asset delivery or cash involving payment of the profit difference. Most crypto options settle in cash, usually in stablecoins or the profit amount in the underlying asset.
American-style options can be exercised anytime before expiration. European-style can only be exercised at expiration. Most crypto options are European-style.
Expiration Strategies
Traders use expiration dynamics in various strategies. Front-month options provide the most premium decay benefit for sellers. Longer-dated options give more time for thesis to play out. Calendar spreads exploit differences between near and far expirations.
Expiration Day Dynamics
Expiration days can see increased volatility as traders close or roll positions. Large open interest at specific strikes can create pinning effects, where the underlying price is drawn toward high open interest strikes.