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Expiration Date Changes from Saturday to Friday

Most traders believe that “expiration Friday” is the true day that option contracts expire. That has never been true. Expiration occurs on the Saturday that follows the 3rd Friday.

However, next year expiration officially moves to Fridays.

You may ask: How is this important to you, the options trader?
Answer: It is of no importance. But you may want to learn the rationale behind the move.

Here is the official definition of “expiration date” according to the CBOE.

Expiration Date:
Expiration day for equity and index options is the Saturday immediately following the third Friday of the expiration month until February 15, 2015. On and after February 15, 2015, the expiration date will be the third Friday of the expiration month.

To understand why expiration was originally set to Saturdays, read my explanation here.

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A Settlement Question

I have a question for you: Yesterday (Thursday), 6/20/13 the NDX closed at 2890, with settlement this morning on the opening prints. At 4:15pm yesterday the 2875/2865 bull put spread mid-price was $1.25. And just seven minutes before the close that spread could be sold for about $3.50 for only $6.50 risk.

Would it not have been a good idea to short the spread because one could keep the whopping $3.50 premium and then could hedge with futures if necessary to cover a gap down open? Would that not have been a good trade yesterday or other days before SPX or RUT settlement with high IV?

Hello James,

Excellent questions, but these are the situations that one has to fully understand before taking the risk, so I am glad that you asked.

There are two major points:

First, there is no need to hedge after a gap down. Once the market opens Friday morning, the value of NDX may change, but the settlement price (NDS) does not change. Therefore, there is nothing to hedge because the profit or loss has already been determined by that opening and you have no remaining risk to hedge. Of course that NDS value is not yet known, but will be calculated from the opening prices of each stock in the index, and announced later in the day.

Note that NDX did open lower on settlement Friday – probably because (this is merely an educated guess) that one of the major components issued bad news just after the market closed on Jun 20. The ‘whopping premium’ did not appear out of nowhere as a gift to premium sellers. Something had to cause that change in the option prices.
In other words, whatever it was that happened was expected to be bearish for NDX the following morning and the puts were bid higher (and I assume that the calls were bid lower).

As it turns out, NDS for this cycle is 2957.95*** and anyone who sold the spread that you mentioned lost the maximum. I hope this is just a theoretically question and that you did not sell any 2765/2775 spreads.

    ***I don’t know how this is possible, but when double-checking that NDS value, I discover that it is now (Jun 23, 1pm CT) listed as 2961.91, making the put spread worth $8.09. Saturday, the settlement price was much higher, indicating that the put spread expired worthless. The fact that the CBOE cannot list a final, unchangeable NDS (that’s settlement for NDX) price is very unsettling.

The true bottom line is that the sudden (after the market closed) surge in the value of such spreads should be a warning that something happened. I am not suggesting that you never make the trade that you suggested, but it is not a good idea to make it without knowing exactly what happened to cause that bearishness.


In a further discussion I learned that James was considering adjusting the position, using futures, prior to the market’s opening on Monday. The problem with that idea is that by the time the futures markets begin trading, any anticipated decline in NDX has already been priced into the futures, and it is too late to hedge the position.

However, I have an alternative to suggest:

    Let’s assume that you wanted to sell 30 put spreads (i.e., trading the bullish put spread) and hedge with an appropriate quantity of futures contracts. How about avoiding the hedge (eliminating upside risk) and selling a far smaller quantity (perhaps 5) of put spreads? That gives you a chance to earn a decent profit, but without being concerned with hedging. That may not work for you, but it is an idea to consider.

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Considerations when Managing Risk III. Expiration day

Holding positions into expiration

For traders who frequently adopt the so-called ‘income’ option strategies, the passage of time is friendly and large market moves are the enemy.

Because each passing day bring additional theoretical profits – if the market behaves – it is difficult for some traders to exit before the very last penny has been earned. I have expressed my feelings about the greediness and riskiness of holding to the end (too much risk for too little reward), but there are other considerations worth mentioning.

Please understand that holding options and waiting for them to expire worthless is unrelated to the ideas of actively trading options on expiration day. Jeff Augen’s book [Trading Options at Expiration] offers advice on how to trade expiration day – and that has nothing to do with holding and waiting for options to become worthless.

Holding A.M. settled, European style, options into settlement

Most options expire at the end of trading on a given day – and that is most often the 3rd Friday of the calendar month. There are exceptions:

  • Weeklys
  • Quarterlies
  • VIX options
  • Morning settled European style index options

The one factor to take into consideration when dealing with morning settled European options is the manner in which the ‘final closing price’ or settlement price is determined. It is not a real world price. It is a fictional price calculated on the following:

  • Use the opening price for each stock in the index, regardless of when it opens
  • Assume that each stock is trading at its opening price simultaneously
  • Calculate a value for the index based on the two items above

That methodology may feel reasonably accurate and it may seem as if it represents a real world price. When markets are calm, all assumptions are true. The price is reasonable.

However, there is a lot of risk associated with holding positions (long or short) into that settlement. Consider a bear market, although it works the same way in a bull market. At the opening, thee are many sellers. Some stocks open quickly while others are delayed due to an order imbalance.

Let’s assume that half the stocks open, the published index price is lower, and that those who held positions see the opening stock for the index and walk away, believing they know where the index will settle. Here’s the real problem. Many times, the market has opened at a low,due to selling pressure. The market comes off the bottom and the index begins to rise. However, there are all of those stocks that have not yet opened. There is still the original sell imbalance in those stocks and they eventually open lower, adding more negative impact to the index. However, that impact is not displayed becasue there is now enough support for stocks that opened earlier to keep the published index price from falling.

Bottom line: The settlement price is based on low ticks from 9:30 ET, even though many of those stacks are already trading higher when other stocks open at a relatively low price (the order imbalance often does not disappear until after the opening). None of the published, real-time prices for the daily index comes close to the very bearish final settlement price. When that price is finally published (end of day, or 1PM ET for SET – the settlement price for the SPX index) it may be FAR lower than the published low for the day.

Settlement prices can bring an unwanted surprise. It’s far safer to exit options no later than Thursday afternoon of expiration week.

My bottom line: There is always danger than an OTM option can move ITM. In this blogger’s opinion, it’s foolish to risk a decent chunk of money in an effort to earn that final nickel or dime from a short option position. Others believe that covering these shorts is a complete waste of money. All I can tell you is that in my experience, covering is well worth the cash cost.

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Trading Traps for the Unwary II

Continuing yesterday’s horror stories, Tristan submitted another:

Something doesn’t seem right about this. I was short the 115-116 call spread in SPY 55 times during March expiration. I was assigned on the 115 call (the short part of my spread) on Thursday after the close (found out Friday morning). This resulted in being short 5,500 shares on Friday morning versus my long 55 116 calls. On Saturday, I was debited from my account a significant charge because I was short the shares when SPY went ex-dividend on that Friday.

Am I responsible for the entire dividend payment for that quarter because I was short the stock on that one day of ex? Seems like stealing. I feel like if I had bought the stock that day, there is no way I would have gotten credit for an entire quarter of a dividend payment. Anyone know how this works?


“Anyone know how this works?” This is the stuff that drives me nuts. If you don’t know how it works, why are you trading a product where it is essential that you understand how it works?

Dividends are paid on specified dates. Whoever is short on that ex-dividend date pays the dividend. Whoever owns the shares collects. Very simple, very efficient and it has always been this way. It’s also fair and reasonable – for owners of the shares. When the stock (or ETF) pays a dividend, the stock price declines by that amount. Gain the dividend, lose in the share price. No one gains or loses.

Alas, it’s not so simple for option owners. When you own an ITM call option that should be exercised to collect the dividend – WARNING: NOT ALL ITM OPTIONS SHOULD BE EXERCISED FOR THE DIVIDEND – failure to exercise results in a real monetary loss. The trader who submitted the question above did not know about the dividend, did not know he should have exercised his calls, and donated his money to some lucky trader who had been short those SPY 116 calls.

To reply to the comment: You are correct. If you bought shares that day (Friday) you would NOT get any of the dividend. You would be too late by one day.

I do agree with the lamenter’s opening thought. There is something not ‘right’ about this situation. What’s wrong is that you should not yet be trading options because your education is far too incomplete.

More Questions from Tristan

For instance, what to do if long puts are automatically assigned upon expiration

If you know in advance that you cannot meet the margin requirement, then do not allow yourself to be assigned at expiration. BUY THEM BACK before expiration. There is no solution that’s any easier. If you are not short the options, then you cannot be assigned an exercise notice.

or if short legs are assigned in spreads

There is almost never any reason to be assigned earlier than expiration (other than exercising a call option to collect the dividend). However, this is a recurring problem for SPY options. It ALWAYS goes ex-dividend on the third Friday of the month. Not knowing that – in advance – is just a huge mistake. If you fear being assigned on any position, then the answer is very simple (Honest. This is a deadly serious situation) Answer: Get out of the trade. Do not hold to expiration. Ask yourself why would you decide to hold to the bitter end? It is so unnecessary. For goodness sake, get out when you may be assigned and especially when you cannot meet the margin call.

If you are assigned on one leg of a spread, and if margin is not a problem, keep the position. Someone handed you a gift, and if the stock makes a big move (down if you were assigned on a call option or up if you were assigned on a put option) then you will score a nice big payday. It’s unlikely, but it has happened before and will happen again.

However, if you are unable to hold the trade and must liquidate, do not decide to exercise your long option to get out of the position – unless this option has zero time premium. It is more efficient to buy back the short stock and sell your long calls [Or sell your long stock and sell your long puts].

as well as simpler topics such as bid/ask spreads, order types, conditional orders , orders I should place in advance . in case I temporarily go into a coma through expiration, the Pattern Day Trader classification, the same-day substitution rule, Regulation T, etc.

There is a lot of stuff on your list. The truth is that most people have no need to understand most items on the list. That raises the question that concerns you: Why are people allowed to trade when they don’t understand the rules? And how do you know what it that you must know when there is no one to provide a list.

The answer to the first question is easy. They are allowed to trade because it is profitable for the brokers. Nothing else matters.

There’s not much that the average trader can do about the items on your list. If he/she becomes a pattern day trader (not a common situation), that’s when he/she will learn about those trading limitations.

Most beginners have no need for conditional orders and have plenty of time to learn how to use them.

However, bid/ask spreads and limit orders are essential items. I assume that anyone who teaches options classes or writes books for beginners includes that information. Traders who jump right in with no education may have some painful experiences when entering market orders. Not everyone can be protected. Would you open an account and enter orders with no advance study or preparation? Of course not and there is no protection for those who do.

You have one advantage. You are aware that dangers exist, and although you may not ask every question, you will be frightened enough to ask questions about any situation that occurs to you. That may not be enough – but you would have to be very unlucky to not have discovered what you need to know when you aware that you don’t know what it is that you don’t know.

Some answers

Don’t pay the offer; don’t sell the bid.

Never never never use a market order. Limit orders only.

There is no need for fancy order types. Limit orders and stops (I don’t like stops for option traders) should be sufficient.

Buy back shorts when they get very cheap – just in case you do temporarily go into a coma through expiration.

The Pattern Day Trader classification is not a concern, unless you day trade. And if you do, you will soon learn the limits.

You can get much of this information from your broker. But get it in writing. The people in customer service may be as bad as your correspondent found them to be (yesterday)

The CBOE stories scare the living daylights out of me — I wonder what these traders were supposed to have read to understand/avoid those problems in the first place. It is not asking too much to know when a stock/ETF you are trading goes ex-dividend.

It really seems like trading was designed for people who have a Series 7 broker’s license and know all these nuances.

I understand how you feel. The bottom line is that people are trading – and they intentionally did not bother to learn the rules. They make bad assumptions and get stuck with the bill. When you sell a call option, you must know that the owner is allowed to exercise at any time prior to expiration. It seems to be a natural question to ask – why would anyone exercise early? That’s when the trader would learn bout dividends.

You may be frightened, but it seems to me that you are taking care to learn about lurking dangers.


No one is forced to trade. Information is available to everyone.

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Pinning stocks at expiration

There’s an excellent site that delves into research papers to find answers for questions raised by readers (CXO Advisory Group). Recently the topic was: Stock Price Pinning at Options Expiration?

A reader asked: “Do you have any research on the phenomenon of ‘pinning’ during options expiration? The theory is that there is a Max Pain price where options sellers stand to lose the least [MDW: It’s called Max Pain because it’s supposed to cause much pain for the buyers], and that they manipulate prices towards these levels.” A search of the Social Science Research Network (SSRN) separately for “pinning” and “expiration” yields the following studies, in descending order of number of downloads:

“Stock Price Clustering on Option Expiration Dates” from August 2004: “This paper presents striking evidence that option trading changes the prices of underlying stocks. In particular, we show that on expiration dates the closing prices of stocks with listed options cluster at option strike prices. On each expiration date, the returns of optionable stocks are altered by an average of at least 16.5 basis points, which translates into aggregate market capitalization shifts on the order of $9 billion. We provide evidence that hedge re-balancing by option market-makers and stock price manipulation by firm proprietary traders contribute to the clustering.”

We cannot argue with the facts, but interpretation of those facts is another matter. Max Pain theory suggests that market makers can pin stocks to the strike. The authors of this paper suggest that is exactly what happens. Their ‘evidence’? A $100 stock moves nearer to the strike price by $0.165. That’s not pinning by any definition of which I am aware. I understand that academics do research and the discovery of that small price shift is ‘evidence’ for them. However, in the real world of trading, it’s not that significant when you consider:

  • The pinning bet must be made in advance
  • The trader must pick the correct stocks because an average of 16 basis points is not very large
  • The trader must choose the right strike price
  • The strike that is closest right now may not turn out to be the correct strike price

Thus, the evidence that ‘proves’ pinning exists does exactly the opposite. It proves that it does not happen.
Continue Reading →

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As expiration nears, how does theta behave?


I am currently on my second round reviewing the greeks, and this time I am going into more depth. As I am putting together my notes I found references that describe time decay for both OTM and ATM positions. To my surprise, the shape of the graphs is different.

The graph that we are all accustomed to seeing shows that time decay accelerates as expiration nears. Most of the theta decay occurs in the last 30 days in which theta is increasing as the remaining time value of the option is decreasing.


When it comes to OTM options, according to the authors, the shape changes significantly. In the last 30 days, decay decelerates and the majority of the decay occurs before the last 30 days. This is the graph of an OTM option and its time decay.


I have been looking at various option series for both stocks and ETFs and I have not been able to confirm this.


If the above statement is true, when trading iron condors, why wouldn't you pick a timeframe for opening the position near 60 days to expiration and probably closing ~30 days before expiration? This would allow the trader to capture a larger portion of the time decay – because OTM positions make up the iron condor.



This is a very thoughtful question and illustrates why spending time trying to understand the things we are taught is such a good idea.  Thank you.

The general view regarding time decay is correct.  Theta accelerates as expiration approaches.  However, we must recognize that some siturations are different.  Let's say that a stock is trading near 79, there's a week left prior to expiration, and the option under consideration is the 80 call.  Surely that option has time value and with that comes time decay – and the option loses value every day.  Just as you anticipate.

However, consider the call option with a 50 strike.  Unless this stock trades with an extreme volatility, the call has already lost all time value (except for a component due to interest rates) and trades with a bid that is below parity. 

Or you can look at the corresponding put (which has the same theta) and see that it doesn't trade and the bid is zero. It has already lost every penny of it's time value.  Its theta is zero.

These are the situations to which your references are referring when stating that time decay decellerates into expiration.  When options move to zero delta and 100 delta, the time decays disappears prior to expiration.

Most traders who are talking about options and their time decay, are not interested in such options (there is nothing of interest for a trader to discuss).  Thus, options such s the 80 call mentioned above (and the corresponding 80 put) have time value, accelerating time decay and an increasing positive gamma.  These options decay according to your first, or 'standard' graph.

FOTM options

There is more to the rate of time decay than the time remaining.  When options are far OTM or deep ITM, things are just different.  Once you understand that situation (as I'm certain you do now), the theta problem goes away. Once an option has only a small time premium remaining, it cannot keep losing value at the same rate – or else it would become worth less than zero.

Iron Condors

Time decay is what makes trading iron condors profitable. Sure it may be good to own the position when time decay is most rapid, but that is not the 60 to 30-day iron condors that you envision.  That would work only when the calls and puts are both quite far OTM.  That means a tiny premium to start the trade.  That's a non-starter for me.

In the real world of condor trading, most options are not that far OTM and have enough time premium to belong in the standard decay group.  When markets behave for premium sellers, the last 30 days are the periods with the most rapid time decay.  For most iron condor traders, that is the ideal situation. However, that's also the period of highest risk – due to negative gamma.  For me, collecting the fastest time decay is not as important as owning a less risky trade.



Peace on Earth.  Liberty for all.  Best wishes for 2011



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Are OTM Options Exercisable?

First off, I love your book! And THANK YOU for doing this blog–you definitely spend a lot of time on this free service for your readers… it is extremely appreciated!

Please forgive the basic nature of my question; my options trading career is in its infancy stage.

When an option is OTM at expiration, does it always expire worthless?

…Say the underlying goes a little toward one of the short options of an iron condor.  The loss builds, but does it build past the point of no return? Does it incur such a big loss that even if the option is OTM at expiration, there is still a loss?

Or is it always the case that 'if an option is OTM at expiration, then that option expires worthless?'



Thanks Rachel,

It's a basic question, but important.  If you don't know the answer, it's difficult to proceed with learning more about options.  That's why it is important.  Thanks for asking.

There are two replies.

The first is the 'universal answer.'

1) When an option is OTM at expiration, yes, it always expires worthless.

However, 'always' is more like 99.99%, than 100%

2) The owner of an option has the right to exercise.  That right is not revoked just because the option is OTM.

Thus, when an option is OTM by one or two pennies, it is possible – unlikely – but possible that the option owner would want to exercise.  The details are not important, but one possibility:

a) A trader is short stock and bid $49.98 to cover the short.  He/she was unable to get stock at his price.  Yet, if the stock closes at $49.99, he may decide to exercise his expiring calls with a 50 strike price – to cover his short stock and not hold the risky position over the weekend.  He ends up paying $50 instead of $49.98, but his risk is eliminated.

b) Even if the option is OTM by a dollar or two, it could be exercised.  This is also very rare. news is issued Friday, right after the market closes.  It is 'obvious' that the news is good or bad and that Monday's stock price will not be the same as Friday's closing price.  Thus, OTM options (calls for good news and puts for bad news) may be exercised – if it were thought the option would be ITM on Monday morning.  This is rare, but it does happen.



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Expiration Surprises to Avoid

This post was first published on Nov 16, 2010 at InvestorPlace.


Unless buying or selling options with a distant expiration date (LEAPS), each trader understands that the value of an option portfolio becomes increasingly volatile as the time to expiration decreases. I is important to be aware of specific situations that may crush (or expand) the value of your positions.

Here are six situations that should be of special concern when expiration day draws nigh.

1) Position Size

When trading options, the most effective method for controlling risk is paying attention to position size (number of options or spreads bought/sold). Smaller size translates into less profit and less reward. However, successful traders understand: minimizing losses is the key to success.

When expiration approaches, an option's value can change dramatically. The effect of time is far less on longer-term options.

Gamma measures the rate at which an option's delta changes. When gamma is high – and it increases as expiration approaches – delta can move from near zero (OTM option) to almost 100 (ITM option) quickly.

Option owners can earn a bunch of money in a hurry, and option shorts can get hammered. However, those short-lived options often become worthless. These are the conflicting dreams of option sellers and buyers.

The point is that having a position in ATM (or not far OTM) options is treacherous, and reducing the size of your position is a healthy and simple method for reducing risk.

Consider reducing position size when playing the higher risk/higher reward game of trading near expiration.

2) Margin Calls

Receiving an unexpected margin call is one of those unpleasant experiences that traders must avoid. At best, margin calls are inconvenient. Most margin calls result in a monetary loss, even if it's only from extra commissions. Think of it as punishment for not being prepared

When you hold any ITM short option position, there is the possibility of being assigned (and converting an option position to stock) an exercise notice. Early exercise is unlikely unless the option is deep ITM. However, you already know that any option that finishes ITM is subject to automatic exercise.

Exiting the trade prior to expiration makes it likely (there is still the chance of being assigned before you exit) that you can avoid the margin call.

Most put sellers (conservatively) sell puts only when cash secured. That means: cash to buy shares is already in the account. When cash is available, there is no margin call.

Those who write call options are subject to the same assignment risk. If the trader is covered, there is no problem. Upon assignment, the shares already owned are sold to honor the option seller's obligations.

When you receive a margin call, many brokers (no warning) sell enough securities (to generate cash) to meet that call. Other brokers automatically repurchase your short options (with no advance warning) before expiration arrives.

Bottom line: When you cannot meet the margin requirement, do not hold a position that is subject to early exercise. And never hold that position through expiration (when assignment is guaranteed). Find a way to exit the trade to avoid possible margin calls. For clarity: If margin is not a problem, none of this applies to you.

3) Increased Volatility

Pay attention to volatility – both volatility of the underlying stock or index as well as the implied volatility of the options themselves.

For option owners volatility is your friend. The fact that stocks are more volatile is enough to raise implied volatility, and that in turn increases the value of your options – sometimes by more than its daily time decay.

If you get lucky twice, and the volatile market moves your way, the option's price may increase many-fold. That's nirvana for option owners.

However, if you are looking at increased market volatility from the perspective of an option seller, volatility translates into fear. Whether a trader has naked short options (essentially unlimited risk) or short spreads (limited loss potential), he/she must recognize that the market (the underlying asset) can undergo a large, rapid price change.

Options that seemed safely out of the money and a 'sure thing' to expire worthless are suddenly in the money and trading at hundreds (or thousands) of dollars apiece. When an index moves 5% in one day (as it did frequently during late 2008), SPX options that were 40 points OTM in the morning were 10 points ITM by day's end. When that happens with an increase in implied volatility, losses (and gains) can be staggering.

There is good reason for the shorts to be afraid. One good risk management technique is to buy back those shorts – whenever you get a chance to do so at a low price. Remaining short, with the hope of collecting every last penny of premium, is a high risk game.

4) Reward vs. Risk

Expiration plays come with higher risk and higher reward. That's the nature of the game. In return for paying a relatively low price for an option, buyers have but a short time for the market to do its magic. Otherwise the option disappears into oblivion.

Most new traders believe they are locked into the trade once it has been made. Not true. You should consider selling those options any time that you no longer believe they can make money.

Don't sell them for a tiny premium, such as $0.05. For that price, take your chances.  But when real cash is at stake, perhaps when the option is priced near $1, then it's a difficult choice: hold vs. sell.  Make a reasoned decision.

Although it seems to be an obvious warning, when buying options near expiration day, please be aware of what must occur to earn a profit. Then consider the likelihood of that happening.

The same warning applies to option sellers. Time may be short, but when the unlikely occurs, the loss can wipe out years of profits. When there's just too little premium, cover the short position and leave the last bit of cash on the table. 

5) Option Greeks – Delta and Gamma

The greeks are used to measure risk. Once measured, it is up to the trader to decide whether risk is acceptable or must be reduced. It's important to understand the greeks of your position and how they change when the underlying moves. It's not necessary to spend hours studying the data. Use the greeks to get a look at the big picture and decide whether your position is ok as is, should be adjusted, or closed.

As has already been mentioned, delta and gamma change more rapidly near expiration (if the option is anywhere near the money). Stay alert to these changes.

6) News Events

When news is released, the underlying stock often undergoes a substantial change in price. If you have a position, or are considering opening a new position, be certain that you know whether news is pending. Such news is most often a quarterly earnings report.

If you are a risk avoider, don't hold short options with negative gamma in the face of earnings releases.

Summary: Expiration is an exciting time for traders who are either long or short options. If you want to play in that arena, understand what you are doing. If you are a more conservative trader, it's easy to exit all trades before expiration draws too near.


The November 2010 issue of Expiring Monthly will be availale Monday, Nov 22.  This month's issue focuses on commodity options.



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