Options contracts have an expiration date, this date is always stated and the price of the option is significantly affected. An option that is not exercised at expiration date would turn into a worthless piece of paper. That is why it is very important to pay close attention on the expiration date as this significantly dictates the price of the option. If a contract is far away from expiration and the strike price is reached, the price of the option would be fair. A contract that is near or at its expiration date, and the strike price is not met, the option contract would be near worthless. If the underlying stock is trading at the strike price or higher with a far away expiration date, the price of the option would be reasonably high. If the same strike price is met or better, but the expiration date is near, the option will lose value a little bit. This value is caused by time deterioration where the price of the option contract is devoid of time value but instead, the price of the contract is now dictated by its intrinsic value because the option is at or in the money. When choosing which option to buy, it is important to pick the best expiration date based on the strategy a trader is intending to execute.

Previous | Next

Stocks | Forex | Options | Economics | Bonds | History | Language learning | Technology | Technical Analysis | Fundamental Analysis
Copyright © 2014 econtrader | Risk disclosure | Terms of Use