In trading, the contract expiration date is the date when a futures or options contract expires and is no longer valid. In other words, it is the final day on which the contract can be exercised or settled, and all open positions in financial markets must be closed before the expiration date. It is vital that a trader understands when their contracts expire, as it will impact the cost of their contract and the trading strategy they wish to use.
In the case of futures trading, the expiration date of a futures contract is the last day on which the holder takes delivery of the underlying asset or makes a cash settlement. In the case of options trading, the expiration date of an options contract is the last day on which the holder can exercise their right to buy or sell the underlying asset.
The expiration date of a contract can have a significant impact on its price. The closer a contract’s expiration, the more volatile its price becomes. This is because the closer to the expiration date, the more likely it is that a contract will be exercised or settled. This can lead to changes in supply and demand dynamics in financial markets.
For example, a trader holds a call option contract with a strike price of $30. The contract is set to expire in three weeks, and the underlying asset’s price is currently at $35.
The trader may decide to exercise the option and purchase the underlying asset at $30 before the contract expires, which will drive up the demand for the asset and increase its price. However, if the trader does not decide to exercise the option, the option expires and becomes worthless. This decreases the demand for the underlying asset and decreases its price.
Time value also affects how an option contract is priced. The closer a contract is to its expiration date, the lower its time value becomes, which can impact its price.
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