When an investor buys or sells an option contract, the trade settles one business day after the trade date (T+1). When an equity option is exercised, it creates a stock transaction. Stock transactions also settle in one business day (T+1).
Holders must exercise their contracts before they expire. Standard options expire within nine months of issuance, and option contracts are identified by their expiration month.
For example, a Coca-Cola Inc. (ticker: KO) January stock option expires on the third Friday of January, technically at 11:59pm ET (10:59pm CT). This date is commonly called Expiration Friday.
In addition to the expiration time, there are a few other key times to know:
Every options trade is either an opening transaction or a closing transaction. There are four types of options transactions to know:
When an investor establishes a new options position, they’re entering an opening transaction. Opening transactions start a contract between two parties:
Let’s look at an example:
An investor opens an options account at their broker-dealer and immediately establishes 1 long Mar 50 call at $5. What type of options transaction was performed?
Do you know the answer?
Answer = opening purchase
It is an opening purchase for two reasons. First, the investor is establishing a new options position, which is an “opening” transaction. Second, the investor is buying (going long) the option, so it is a “purchase” transaction. Putting both together, we have an opening purchase.
Let’s try one more:
An investor opens an options account at their broker-dealer and immediately establishes 1 short Oct 90 put at $8. What type of options transaction was performed?
Do you know the answer?
Answer = opening sale
It is an opening sale for two reasons. First, the investor is establishing a new options position, which is an “opening” transaction. Second, the investor is selling (going short) the option, so it is a “sale” transaction. Putting both together, we have an opening sale.
Investors can exit an options position before it is exercised or expires by trading the position in the market. It helps to think about closing from two perspectives:
When an investor buys (goes long) an option, they can exit by selling that same option contract later.
For example, if you own an option that gives you the right to sell stock at $50 (a long 50 put), another investor might want that contract. You can sell it for the option’s current premium. This is a closing sale:
Option writers (the short side) exit in the opposite way. Suppose you initially establish a short position that creates an obligation to buy stock at $50 (a short 50 put). To get out of that obligation, you return to the market and buy the same option contract.
When you buy the same contract, the investor who sells it now takes over the obligation. This is a closing purchase:
Closing purchases and closing sales can feel backwards at first, so keep this rule in mind:
Let’s go through a few examples to reinforce what we’ve learned:
An investor opens an options account at their broker-dealer and immediately establishes 1 short Dec 25 call. One week before expiration, the investor requests to exit the position. What options order must be submitted to execute the transaction?
Do you know the answer?
Answer = closing purchase
Initially, the investor established the short call through an “opening sale.” However, the question is asking about exiting (closing) the position.
It is a closing purchase for two reasons. First, the investor is exiting a current options position, which is a “closing” transaction. Second, the investor must buy (go long) the option to exit the position, so it is a “purchase” transaction. Putting both together, we have a closing purchase.
Last one!
An investor opens an options account at their broker-dealer and immediately establishes 1 long Jun 65 put. One week before expiration, the investor requests to exit the position. What options order must be submitted to execute the transaction?
Do you know the answer?
Answer = closing sale
Initially, the investor established the long put through an “opening purchase.” However, the question is asking about exiting (closing) the position.
It is a closing sale for two reasons. First, the investor is exiting a current options position, which is a “closing” transaction. Second, the investor must sell (go short) the option to exit the position, so it is a “sale” transaction. Putting both together, we have a closing sale.
Sign up for free to take 8 quiz questions on this topic