By Bayo
We are hoping this to be an easy and simple lesson to introduce options to you. By following Options Basics' articles, you should be able to understand options and how to utilize options to either profit or protect your stock.
As we mentioned before, when buying an option contract, you are given the right to buy or sell a stock at a specified price. However, the right doesn't last forever, and the contract becomes obsolete after the expiration date.
An expiration date is the last day that option contracts are valid. American options can be exercised at any time before the maturity date. European-exercise options can be exercised and assigned only at expiration.
As the example below, there are different expiration dates when trading options. The final trading day for an option is commonly the day of expiration.
As the option approaches its expiration date, the option's premium stems mainly from the intrinsic value. At expiration, the owner may exercise the right or, if the option has no value to the holder, let it expire without exercising it. Thus, timing really makes sense.
In general, the longer an option has to expire, the more time its stock price has to reach its strike price and thus the more time value it has. Buying options near expiration cost less but expire soon, while options with more time to develop profitably cost more. Options Investors should consider fully and take different strategies.
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Source: Investopedia