Options on Expiration Day

E*TRADE from Morgan Stanley


All options have an expiration date. It is part of the creation and listing of all new series of calls and puts on the various underlying stocks, ETFs, indexes and futures on which options are made available to buy and sell. The expiration date is the end of the contract – the last day the owner of the option has the right to buy or sell the underlying asset at the strike price.

As options trading has grown, the number of available expiration dates has expanded as well. This proliferation of new listing cycles, which traditionally expired on Fridays, now includes weekly, monthly, quarterly, and long dated expiries.

Lately, weekly options, which expire on every day of the week, have been listed on select index and ETF products. The result of the growth of weekly expirations and the increase in the number of expiration cycles available means expiration day is no longer a once a month or once a week Friday occurrence, but rather, in some asset classes, is an everyday occurrence.

The media recently has attached a new moniker to options which have reached their expiration date – Zero Days to Expiry or 0DTE options – but this is neither a new product nor are they new instruments. Traders may also refer to 0DTE options as "daily options," but again, there is no such thing as a newly listed, “daily option.” These are listed options that have reached their expiration date. So they now have less than one full day of trading left before they expire, as eventually, every option expires.

As options have been listed with more frequent expirations, the availability of 0DTE options has naturally increased. For some investors, the availability of daily expirations has allowed them to make one-day, targeted trades. However, with that exposure immediately focused to expiration day, it is important to understand the potential risks of continuing to trade on expiration day, which include, but are not limited to:

  • Loss of premium. As with any option trade, buyers of options which expire today have a defined risk profile, which includes the potential to lose up to the total amount paid for the option. Additionally, theta (or time decay) generally benefits sellers of options, not buyers. On expiration day, expect up to 100 percent of the time value to decay from the options premium over the course of the trading day.
  • Significant losses over a short period of time. Due to the risk profile and increased leverage of expiring options, sudden moves in the underlying price can yield significant losses over a short period of time for options sellers and buyers on expiration day. • Elevated margin requirements. Because of the added risk associated with expiration day, you may be subject to elevated margin requirements.
  • Assignment and pin risk. The long holder of the option contract holds the right to exercise their option. Even if the option contract appears to be out of the money (OTM) at the close of trading, news can impact the extended hours stock price and expose the seller of the options contract to the risk of being assigned. Additionally, the “moneyness” of an expiring option can quickly change, going from in the money (ITM) to out of the money (OTM) or OTM to ITM with only a small move in the stock price. This may also expose the seller of the options contract to the risk of being assigned since options ITM by $0.01 are subject to automatic exercise/assignment.
  • Liquidation. E*TRADE may liquidate long or short positions in your account if your account value cannot support a potential exercise or assignment.

Expiration days for both long and short users of options require knowledge to understand the process and risks associated with the end of the life of the option contract. Although 0DTE are just expiring options, you may want to refresh your knowledge of the process and risks associated with options exercise and assignment. For more information on options exercise and assignment, check out the following articles: Expiration Process and Risk and Understanding options assignment risk.

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