How to Pick Options Expiration Dates
Options trades are complex, and traders should watch for a few critical variables. While they may make options trading seem overwhelming, I have a process that I use to maintain my trading objective and execute the correct setup.
Selecting the accurate options expiration dates is not only an often overlooked detail, but this is the very area where traders frequently struggle. It doesn’t matter how great your strategy is or even if you executed the perfect options setup. If you have the options expirations date wrong, your whole plan can crumble, and the losses can be catastrophic.
In this article, I will share the process that allows me to choose the option’s expiration dates that I am comfortable taking. So let’s dive into it and go through what works for me.
What is an Options Expiration Date?
An option is a contract that enables you, the buyer, the right to “buy” or “sell” a stock at an established price, also known as the strike price, and the time frame at which the option expires.
Every options contract has an expiration date. Some expiration dates last a week, some last a month, and others go even longer. Your strategy is based on what you anticipate in the market to establish the strike price in the contract and the listed expiration date. As you purchase an option, you have not only entered into a binding agreement with a seller – but also a race against time.
With theta decay, premium decay, and time decay, working against you, options trades can get expensive quickly. The option starts to lose value the moment you enter into the contract. The time frame of the setup dictates my selection of the expiration dates.
When placing options trades, it is essential to remember these key points:
- Options are “depreciating assets” that lose value over time.
- The amount of time remaining to expiration on the executed option trade will dictate how quickly or slowly that option loses value. We refer to this as premium-decay.
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Video Guide to Options Expirations Date
How to pick an Options Expiration Date
Picking an options expiration date is part science and part art. Traders need time to become proficient at selecting expiration dates. However, it takes some time and experience for traders to reach a comfort level with them.
But, let’s say that I am taking a trade on a weekly chart with a nice, bullish squeeze. I will give that trade much more time to expiration when using a 15- or 30-minute chart. Below you can see the guidelines I use for my options trades.
- Weekly Setups: 6-8 weeks
- Daily Setups: 2-4 Weeks
- 4 Hour Setups: 5-10 Days
- Lower Time Frames: 3-5 Days
The time frames above are what I use for my setups. But, as I said before, traders should be aware of many variables in options trades. Remember that not every option contract is the same.
Below are some unique options contracts that traders can trade. While they are popular trades, they are not standard and vary from the norm.
- Zero (0) Days to expirations (0DTE): 0DTE are options that expire on the same day as purchased. Same-day expiration: these are ideal for weekly income trades.
- $SPX Options: SPX options are considered European options; this style of options cannot be executed before its expiration date.
- Credit Spreads: These make premium decay work in your favor. If I am selling a put credit spread set to expire in three days, I can sell quicker – but it’s much riskier. If I sell a credit spread in 300 days, it will come in much slower.
Remember, it’s about maintaining balance and discovering what works for you. You should understand your risk threshold, favorite setups, and preferred trading strategy. There will be trial and error. But, when you research the expiration date you select and ensure it coincides with technical analysis, you will begin to see the rewards of your efforts.
How to Trade Around an Options Expiration Date
Expiration dates for options fall on different days. It’s even possible to find an expiration date relevant to your schedule or create a strategy around a specific date. Below you can see an example of an options chain.
Traders can trade options in several ways, but getting the dates correct for your strategies is essential. Some trading strategies are better suited for specific expiration days.
I prefer to use the squeeze in my trading setups. The weekly, daily, and hourly squeezes determine how I operate and what I do with these particular time frames when trading options.
My trading method primarily focuses on squeezes. When I choose an expiration date, I first consider a few things. I look at the options setup and the timeframe where I can anticipate the squeeze will fire.
A weekly squeeze can sometimes take two to four weeks before it starts to move. When the squeeze fires, it can take another two to five weeks before we see the profit potential from that options trade. Weekly squeezes can take weeks to develop – and once it fires, they can take weeks to finish.
It wouldn’t make sense for me to choose an expiration date that expires in a week when the chart will have a great set up a month later. I would give the squeeze time to build and try to select an options expirations date between six to eight weeks.
A daily squeeze uses a different time frame rather than a weekly chart. But, the concept is still the same. You want to pick appropriate options and expiration dates that make sense for that move. A daily squeeze may take a week, or two weeks, to start moving. Once the daily squeeze fires, it can take another week or two to finish.
Once I find the setup I want to trade, I give it enough time to develop and unfold to be profitable. I would choose an expiration date that’s thirty days out, however, the dates don’t need to be exact. You should find an excellent balance to optimize your chances of gaining a profit. In my experience with daily charts, the sweet spot is generally 30 days. So, I look for daily charts with squeezes and place them 30 days out.
The hourly squeeze gives more flexibility than one might think because if you find a perfect setup, you can always find options that expire the same day – tomorrow or the day after. That can greatly benefit you because the premiums are cheaper, and the opportunities are out there.
Like with weekly and daily squeezes, you want an appropriate timeframe for an hourly squeeze to develop. Once it fires, then you can give it enough time to finish. Based on my risk threshold and guidelines, I usually buy a 4-day to 10-day option expiration for an hourly squeeze.
Options expirations dates are an essential element of the options trade to understand. You don’t want to under or overestimate your options trades. My guidelines above illustrate how I operate in my trading strategies.
My process for finding the best options expiration dates are simple to remember:
- Find a good setup that aligns with my trading style
- Determine the correct strategy for that setup
- Allow enough time for a squeeze to develop and subsequently fire
Remember, once you enter an options trade, the clock starts and time starts working against you. My process gives me plenty of time to execute my trades effectively, so I don’t have to worry about time running out. I hope this article helps you in your trading career, but if you still have questions and are looking for guidance, consider joining me in my Compounding Growth Mastery. Members gain access to many resources. Not only do you get to trade with me on weekly sessions, but you’ll get real-time alerts on the trades I make, and my trade spreadsheet. So, what are you waiting for? Sign up today, and never trade alone again.
FAQs on Options Expirations Dates
An options contract gives the buyer the right, but not the obligation—to buy (call contract) or sell (out contract) the underlying asset at a specific price on or before an agreed upon date.
options expiration date is on the third Friday of the month at market close. If the Friday the option is supposed to expire on is a holiday, then the options contract will expire the day before on Thursday. Be mindful of the stock options expiration date and keep a close eye on it.
A: American options are your standard options contract connected to an underlying stock asset. European options are tied to the Indices such as the S&P 500, Dow-Jones, and the Nasdaq. The key difference between the two is that, unlike American options, European options are only allowed to be exercised on the day of expiration.
A: Theta Decay is a term that refers to the decline in value of an option as time passes. The longer a trader holds an options contract, the less valuable it is the closer it is to maturity.
A: Traders who own options contracts are not bound to exercise the option contracts. If an options trade is not profitable for the trader, they can sell the option back to the market for a loss or walk away and let the option expire worthless.