When Should One Let In-money Call Options Expire?

Key takeaways

1. The expiration date is the specific date and time an options contract expires.
2. An options buyer chooses the expiration date based primarily on 2 factors: cost and the length of the contract.
3. Volatility estimates, Greeks, and a probability calculator can aid you lot make this decision.

Dissimilar stocks, exchange-traded funds (ETFs), or mutual funds, options have finite lives—ranging from a week (Weeklys^ane) to every bit long every bit several years (LEAPs). The further out the expiration date, the more than fourth dimension yous have for the merchandise to be profitable, but the more expensive the pick will exist. Thus, figuring out the balance between price and time until the contract expires is a primal to success when ownership or selling options.

Unpacking the expiration date

When do options expire?

Monthly options expire on the 3rd Friday of the expiration month. A note of caution: Trading near an option's expiration appointment can be more complex versus when there is more fourth dimension to expirationⁱⁱ. Inexperienced traders should use circumspection.

Let'south say that on January one, you bought i April XYZ 50 call for a $three premium (the toll of an selection is known as the premium). This choice would give yous the correct to buy 100 shares of XYZ stock (one contract typically covers 100 shares) at a strike cost of $50 at any time before the expiration appointment in Apr—regardless of the current market cost.

Suppose the underlying stock rose to $60 on March 1 and you decided to exercise your option, which was "in the money" because the strike price was less than the price of the underlying security. Your profit, before taxes and transaction costs, would be $700 ($lx stock toll minus the $50 option strike price, less the $3 premium, times 100).

Just was the Apr expiration appointment the all-time choice for your strategy? Allow'southward say that in January, you lot could besides take bought a March XYZ 50 call pick for a premium of $ii, or a May XYZ l call option for a premium of $4. Here are the breakeven prices (the price the underlying stock must hitting for the option to go profitable) for these three dissimilar hypothetical options:

• March XYZ 50 phone call with a $2 premium: $52 breakeven
• Apr XYZ 50 call with a $3 premium: $53 breakeven
• May XYZ 50 call with a $4 premium: $54 breakeven

The trade-off for the longer time until expiration is a higher cost and, consequently, a higher breakeven price.

How do y'all determine which expiration engagement is right for your strategy? Merely as you need to make a cost forecast for an underlying stock before picking an option'due south strike price, so to do y'all demand to make a forecast of how long information technology will likely take for your trade to get profitable before picking an option'southward expiration appointment. Equally always, start with your outlook. Then, decide which specific option would exist the most appropriate.

iii tools

Here are 3 tools, amidst others, that can help you choose the right expiration appointment for your strategy:

one. Volatility

Your cess of volatility is ane of the virtually important factors when selecting both your options strategy and the expiration appointment. Many options traders rely on unsaid volatility (4) and historical volatility (HV)³ options statistics to help them pick an expiration date.

Implied volatility, in particular, tin be the X gene in options pricing. It can give you an thought of how expensive or cheap an option may be, relative to other expiration dates. Typically, the higher the IV, the more expensive the option.

For instance, let'southward say the March XYZ l call has a 30-day Iv of 20, the April XYZ l telephone call an IV of 40, and the May XYZ 50 phone call an IV of xc. If XYZ was scheduled to written report earnings in May, it might explain why that calendar month'due south IV is so much college than the IV in previous months.

If you recall the company is going to study very strong earnings that exceed the market's expectations, and the stock is going to make a stiff move higher as a result, it might be worth your while to purchase the more expensive May contract. By assessing each contract's IV, you can weigh how much you are willing to pay for the length of the contract.

Furthermore, implied volatility tells you how cheap or expensive the premium is relative to past Four levels. A higher Iv indicates a higher options premium. This may sound like a do good to an pick seller. However, y'all need to consider the merchandise-off, which is perhaps that a higher-than-normal IV may be due to an upcoming announcement or earnings release that is causing the marketplace to await a large price move. Thus, you demand to weigh the cost against your expectation for the stock to move.

Volatility options statistics are available on Fidelity.com and Active Trader Pro^®.

ii. Greeks

Greeks are mathematical calculations designed to measure the touch of various factors—such as volatility and the time to expiration—on the price beliefs of options. At that place are ii Greeks in item that can help y'all selection an optimal expiration engagement.

Delta, which ranges from –one to +one, measures an option'southward sensitivity to the underlying stock toll. If the delta is 0.70 for a specific options contract, for example, each $1 motility by the underlying stock is predictable to result in a $0.70 motility in the pick's toll. A delta of 0.seventy likewise implies a 70% probability that the option will be in the money at expiration. Generally, the greater the probability that the option volition be profitable at expiration, the more than expensive the option will be. Alternatively, the lower the probability suggested by delta, the less expensive the option will likely exist.

Theta quantifies how much value is lost on the selection due to the passing of time, known equally time disuse. Theta is typically negative for purchased calls and puts, and positive for sold calls and puts. If XYZ were trading at $50, and a 50 strike call with 150 days until expiration had a premium of $5.xxx and a theta of .018, you might anticipate that the choice might lose about $0.018 per day until expiration, all else being equal.

The accompanying table reflects how theta tends to behave over time and its human relationship to an pick'southward premium.

To detect the delta or theta for an options contract, look at the options chain for a particular stock.

3. Probability calculator

If yous want a more precise calculation of the probability that a particular expiration engagement will be in the money at various strike prices, you lot can use Fidelity's Probability Calculator. Become to the options research page on Fidelity.com, select the Quotes and Tools tab, and and then enter a ticker symbol or log in to Active Trader Pro.

The Probability Computer enables y'all to adjust the stock price target, expiration engagement, and volatility parameters to determine the odds of the underlying stock or index reaching a sure price. The estimator also allows y'all to enter dissimilar expiration dates to determine the probability of a successful trade.

For case, yous can see the probabilities of an underlying stock hit different breakeven prices (east.g., $52, $53, $54) past March, April, and May. Using this information, yous can assess how much you want to pay for the varying expiration dates.

Time to brand the determination

Of grade, there are other considerations when making an options trade. These include selecting the underlying stock to which the option corresponds, the liquidity of the option contract, the particular strategy you are because, and the strike cost, amid others. And information technology's critically important to understand all the risks and complexities involved with trading options.

The expiration date selection, in improver to these other decisions, can help y'all potentially better the odds that your trade will finish upwardly in the money. When choosing the expiration date, information technology'south about balancing time and cost.

Next steps to consider

Get new options ideas and upward-to-the-minute data on options.

Here are 5 steps to develop an options trading programme.

Larn nigh covered calls, protective puts, spreads, straddles, condors, and more.

Options trading entails significant take a chance and is not advisable for all investors. Certain circuitous options strategies bear additional take chances. Before trading options, please read Characteristics and Risks of Standardized Options. Supporting documentation for any claims, if applicable, volition be furnished upon request.

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Source: https://www.fidelity.com/viewpoints/active-investor/options-expiration-date

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