Option expiration and price (video) | Khan Academy
Forward and futures contracts Video transcript Let's explore a bit how the price of an option can vary, or how it can relate to the actual expiration date. So what I'm going to do is compare two similar options with the underlying stock being General Electric.
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And they're going to be the same in every way, except one is going to have a further out expiration expired option. So let's compare this call option right here.
By Chizoba Morah Updated Jul 30, A stock option gives the holder the right though not an obligation to buy or sell a stock at a specified price. The option can be exercised any time before expiry, regardless of whether the strike price has been reached.
And it has an April, expiration. So it's going to expire, or the last day of trading that you could trade this option, will be the third Friday in April. Let's compare that with an option that has the same expired option price, but has a December, expiration. And you can see right when you compare the options expired option the one that has a further out expiration cost more. And the reason why it costs more is because expired option get to retain the option for longer.
Let me draw a hypothetical stock chart. And so you could imagine, let's say, that you have both of those options. Or you have the option to have either one of those options.
And let's say that the stock does something like that. Well, it's going to be in the money.
So you would make money. But if you have the option with a closer expiration, with the April, expiration, you have to exercise the option right now. You would have to exercise it right now and close out the option.
If you had the longer dated option, you could do it. You could do the exact same thing that this owner of an April, option has.
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Or you can hold the option and maybe see if the stock continues to go up. Or you could imagine a downside scenario.
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Maybe the stock does something like this, where it goes out of the money. Someone who holds the closer dated option, the one that expires first, they'll be completely out of the money.
The option would be worthless on this date. But if you have the longer expiration, if your option does not expire until December ofthen you could hold it.
And maybe, maybe the stock will do something nice. There's some probability that it will one day become in the money. I want to make it clear. Expired option if you have this expired option here, and you hold the longer dated option-- you have the option that's going to expire in December-- you still would not want to exercise it.
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Because there is someone who would still enjoy all of this optionality of the future. So what you're better off doing, instead of exercising the option, you're better off selling the longer dated option right over there. And you should be able to capture at least as much profit as you would from expired option the option, plus capturing whatever value the buyer sees in the future optionality. Our mission is to provide a free, world-class education to anyone, anywhere. Khan Academy is a c 3 nonprofit organization.
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