Have you seen 'DTE' while scrolling through social media and wondered what it means? DTE, or 'days to expiry,' indicates how long remains before an option contract expires. Curious how expiration dates affect option premiums and impact your trading strategy? Whether you're new to options trading or curious about the nuances of crypto markets, this guide will provide you with all the information you need to navigate expiration dates confidently. From explaining what options expiration dates are to understanding what happens when options expire, here's everything you need to know about crypto option expiration dates.
TL;DR
Expiration dates are a vital component of any options contract and effectively determine the remaining lifespan of the contract along with its value.
Time decay (theta) erodes the value of options as expiration approaches, especially for out-of-the-money contracts, where the chance of hitting the strike price is low.
Volatility in crypto markets makes options trading riskier but potentially more rewarding for those who understand market dynamics.
Cash settlement is common in crypto options, and traders need to understand this difference from the physical settlement of traditional options.
Properly managing expiring options through exercising, rolling over, or letting the contract expire can help mitigate risks and maximize gains.
What is an option expiration date?
An option expiration date is the last day an options contract is valid. After this date, the option either gets exercised, assigned, or expires worthless, depending on whether the contract is in-the-money (ITM) or out-of-the-money (OTM).
For both traditional and crypto options, the expiration date is a deadline for making decisions regarding the option contract. In simple terms, it’s the point when holders of the option contract must either decide to exercise rights to act on the underlying asset or allow the option to expire.
In traditional options markets, these expiration dates often follow standardized schedules, such as the third Friday of every month for monthly contracts. However, in fast-moving crypto markets, shorter expiration timelines allow traders to quickly react to volatility, giving them the flexibility to profit from sudden market changes. This is particularly important for traders who engage in strategies like gamma scalping, where the time value is crucial. We'll cover more on this later.
How option expiration works
When you buy or sell an option contract, you're agreeing to either buy or sell an underlying asset at a specific strike price before or on the expiration date.
Types of options: calls and puts
To understand expiration fully, let's first grasp the difference between call options and put options.
A call option gives the holder the option to buy an underlying asset at a specific price before or on the expiration date.
Similarly, a put option gives the holder the choice to sell an underlying asset under the same conditions.
The expiration date defines the period during which this right is valid. After the expiration date, the option contract is considered void, and no further actions can be taken. Now that you understand how expiration dates impact your options, let’s explore how different types of options give you varying degrees of flexibility when it comes to exercising those rights.
European vs American style options
There are two primary styles of options based on when these contracts can be exercised.
European options can only be exercised on the expiration date itself.
American options can be exercised at any time before the expiration date.
Our crypto options operate in the European style, meaning crypto options traders can’t exercise the contract until it’s agreed expiration. This is particularly important for traders to keep in mind, as it limits flexibility compared to American options.
When do options expire?
The expiration of an option is predetermined when the contract is created. While traditional options markets follow established expiration cycles of weekly, monthly or quarterly cycles, crypto option contracts tend to offer more variety.
Crypto options expiration
In traditional options markets, here's a typical option expiration date cycle.
Weekly options expire every Friday.
Monthly options expire on the third Friday of each month.
Quarterly options follow calendar quarters, expiring in March, June, September, and December.
In the crypto space, options expiration may follow similar cycles, but crypto options exchanges often provide more flexibility. Crypto options might offer shorter timelines such as daily expirations, allowing traders to take advantage of the market's higher volatility. Popular options trading platforms like OKX offer contracts that expire in a matter of days or months, catering to both short-term and long-term traders.
Keen to learn more about crypto option contracts with us? Check out our various option contract expiries.
The impact of impending expiration on option premium value
As an option approaches its expiration date, the value of the contract is influenced by several factors, the most important of which are the option greeks known as theta and gamma.
Understanding time decay (theta)
Also known as theta, time decay refers to the erosion of an option's value as it nears expiration. Typically represented by a negative number, theta subtracts from the overall option premium over time. Since options have an expiration date, their value effectively decreases over time. This makes sense since there's gradually less time over which a huge price spike may occur. This is particularly true for OTM options, which become less valuable as the likelihood of reaching the option's strike price diminishes.
For example, if you hold an OTM call option to buy Bitcoin at $70,000, but Bitcoin is trading at $62,000 a week before expiration, the value of the option will rapidly decrease as time runs out for Bitcoin to reach or surpass the strike price.
Understanding gamma
As a second order option greek, gamma measures how much the option’s price sensitivity (delta) changes as the underlying asset's price moves. Think of gamma as the accelerator for delta: the closer the option is to the strike price, the more sensitive it becomes to even small movements in the underlying asset. This is why understanding gamma becomes critical, especially in volatile markets like crypto.
The interplay between theta and gamma
While theta works against the option's value, gamma can sometimes offset this decay. If the underlying asset's price moves significantly in the direction favorable to the option, the increase in delta due to gamma can outweigh the time decay. However, as expiration approaches, both theta and gamma increase, creating a volatile situation where the option's value can fluctuate rapidly, depending on the underlying asset's price movement.
Overall, the impact of impending expiration on option premium value is primarily influenced by theta and gamma. Understanding these option greeks is crucial for managing risk and making informed decisions in crypto option trading, especially as options approach their expiration date and become at risk of expiring worthless. For more experienced crypto option traders, understanding advanced concepts such as volatility skew, implied volatility, and the use of crypto option strategies can further enhance a traders' ability to manage risk and capture potential gains.
What happens on the expiration date?
The expiration date is a critical moment for options traders, as it determines the fate of the contract. Here’s what can happen on the expiration date:
In-the-Money options
If an option is ITM at expiry, meaning the strike price is favorable compared to the last traded price of the asset, the option holder can choose to exercise the contract. For a call option, this means buying the underlying asset at the agreed-upon strike price. For a put option, it means selling the asset at the strike price.
Out-of-the-Money options
If a call option is OTM at expiry, this means the strike price of the call option contract is greater than the last-traded price. If a put option is OTM at expiry, this means the strike price of the put option contract is lower than the last-traded price of the crypto asset. This means that the OTM option will expire worthless as the option holder will be unable to exercise their right to buy or sell the underlying asset.
Crypto options expiration vs traditional options
Crypto options differ slightly from traditional stock options in how expiration is handled. These differences are driven largely by the volatility of crypto markets and the infrastructure supporting crypto derivatives trading.
Volatility and expiration
One of the key differences is taking into account the increased volatility of the crypto markets. In highly volatile markets like crypto, options can swing dramatically in value in the hours leading up to expiration. A Bitcoin option could be OTM in the morning but end up ITM by the afternoon, purely because of the extreme price swings common in this market. As a result, traders need to account for these sudden price swings when planning their strategies around expiration dates.
Settlement processes
In traditional options, most contracts are physically settled, meaning the buyer of the option contract receives the underlying asset. With options on OKX, the exercising of crypto options is cash settled. This means traders who own ITM options will receive the cash equivalent of the asset's price difference rather than the asset itself upon expiry.
How to manage expiring options
Managing your options contracts as expiration approaches is crucial for any options trader. Here are a few strategies to consider when dealing with expiring crypto options.
Exercise the option
If the option is ITM, exercising it may be a more lucrative move if the bid-ask spread for the specific options contract is wide and you're not able to get a fair price. For a call option, this means buying the underlying asset at the determined strike price, while for a crypto put option, this means selling the crypto asset at the agreed strike price.
Roll over the crypto option
Another strategy is to roll over the option. This involves closing the current position and opening a new one with a later expiration date. Rolling over can help avoid the time constraints of the original contract while maintaining exposure to the asset. This act of rolling the option would be ideal for option contract writers who have a short call or put option position.
Let the crypto option expire
If the option is OTM, it may be best to let the option expire worthless since it's unable to be exercised. This approach is most suitable if the cost of rolling over or exercising the option outweighs the potential benefits. However, letting options expire isn’t always the best strategy. Even OTM options can still hold some value before expiration, so it's crucial to monitor your positions closely and consider exiting before the option loses all value.
Common pitfalls of crypto options expiration
As expiration nears, there are several pitfalls traders should be aware of. Here are some to take note of.
Overlooking time decay
Unfortunately, theta is often underestimated as option traders sometimes adopt a hold-and-hope approach. Many of them simply wait too long to make decisions, only to see the value of their option contracts erode significantly as expiration approaches. This can be especially dangerous for crypto option contracts with less than 30DTE since time decay tends to accelerate exponentially as each day passes. To avoid this, set alerts for key dates or use a rolling strategy to keep your position open without being subjected to rapid theta decay.
Failure to manage risk
Since trading crypto options is a form of leveraged trading, it can allow for excessive losses if risks aren't properly mitigated. By allowing options to expire worthless, crypto option traders tend to suffer losses without considering alternative strategies like rolling over or closing existing positions.
Lack of planning
Expiration dates can sneak up on traders who aren’t paying attention given the sheer volatility of the crypto options space. It's therefore critical to keep track of these dates to avoid missing all-important deadlines.
Final words and next steps
Option expiration dates are a fundamental aspect of trading that every crypto options trader must fully understand. In the crypto market, where volatility is common, the significance of these dates is amplified. By comprehending how expiration dates work, crypto options traders can manage their positions more effectively, avoid common pitfalls, and make better-informed decisions that suit their long-term trading goals.
Interested in learning more about crypto options trading with us? You'll find all the relevant contract specifications with our introduction to options on OKX. Additionally, for more in-depth tips to crypto option basics, read up on our guides to multi-leg crypto option strategies and how to hedge with crypto options.
FAQs
When crypto options expire, they're either exercised or they expire worthless. If the option is in-the-money, it can be exercised, often resulting in a cash settlement. If it is out-of-the-money, it expires worthless.
Once the expiration date has passed, the options contract becomes invalid and untradeable. Therefore, all actions must be taken before or on the expiration date.
High volatility in the crypto market can lead to drastic price swings, impacting the likelihood of an option being in-the-money or out-of-the-money as it approaches expiration. To manage this volatility, traders can use hedging strategies like straddles or strangles, which allow them to benefit from large price movements in either direction.
Crypto options may have different expiration cycles depending on the exchange. While some align with traditional options weekly or monthly, many crypto platforms offer more frequent expirations, including daily options.
To manage risk, consider rolling over the option, exercising it if currently in-the-money, or letting it expire if it's out-of-the-money. Always monitor expiration dates closely to avoid unnecessary risk given the chances of unexpected losses in the volatile crypto market.
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