Expiration Date

What Is an Expiration Date?

An expiration date is the deadline set in a derivative contract after which the contract no longer exists or can no longer be used. It is most commonly associated with options and futures contracts, where it defines the period in which the holder can act on the agreement. Once the expiration date passes, the contract has either been exercised or settled, or it has simply lapsed without value.

How It Works

Every listed option has a fixed expiration date, which for standard U.S. stock options is usually the third Friday of the contract's month. Options come in two broad styles. An American-style option can be exercised at any time up to and including expiration, while a European-style option can only be exercised on the expiration date itself. Futures contracts also have a final settlement date. Many traders close their positions before that date, since holding a futures contract through expiration can lead to delivery or cash settlement obligations.

Why It Matters to Investors

The expiration date is a key part of an option's value. The time left until expiration is a major component of time value, and that component generally shrinks as the expiration date approaches, a pattern known as time decay. Investors looking at options will usually see several expiration dates listed, with shorter-dated and longer-dated contracts behaving differently. Missing an expiration date can have real consequences, such as an in-the-money option being automatically exercised or an out-of-the-money option expiring with no value. The date can also matter in relation to scheduled events, such as company earnings announcements, because the timing of a contract can affect how its price responds.

Example

Suppose an investor buys a call option on a stock with an expiration date three months away. If the stock does not rise above the strike price by that date, the option expires worthless and the premium paid is lost. If the stock rises above the strike price before expiration, the option can be sold or exercised, depending on the investor's choices and the contract's style. In both cases, the expiration date sets the boundary for when the contract can still be used.