Option trading using an expiration date can be a great path if you know what you’re doing. But there are a few important factors to keep in mind to help make sure you get the maximum returns on your investments. The most obvious one is you’ll want to set yourself reminders of the expiration date using option trade alerts. But there’s more to remember than just that. Here are some pro tips to help you succeed when trading on an expiration date.
What is an Option Expiration Date?
An option expiration date is the last day security is active. After that, it closes for trading and activity. Trades that take place on an expiration date will either result in a positive return or negative outcome for the securities involved (and their owners).
If you’re working with an options contract, this is the date when the option holder gets to either take their gains and walk away happy or lose what they initially invested in the option.
Now that we’ve clarified what an option’s expiration date is and how it works, here are a few tips to make the most of expiration date transactions.
Consider an Automatic Exercise
An automatic exercise a way to protect options holders who forget to make a move on their options on the day they expire. Ordinarily, if you forget to take action on your options on their expiration date, you’d be stuck, unable to take advantage of a positive outcome. But with an automatic exercise policy, you don’t have to worry about that. You’ll be able to profit off a favorable option situation without doing anything on the actual expiration date.
Automatic exercises are a system put in place by some investment banks. If your investment bank offers automatic exercises, consider taking advantage of that choice. If not, make sure to sign up for option trade alerts so you don’t risk forgetting the expiration date and losing out on gains.
American and European Markets Handle This Differently
If you have American-style options, you can exercise them anytime during the gap between the purchase and expiration date. If you’re dealing with European-style options, they can only be exercised on the expiration date, when the contract has officially expired.
Keep in mind that whether your options are American- or European-style isn’t determined by their geographic region. You might find European-style options in America or vice versa. You may find both in other country’s markets. Know which you’re dealing with so you can make the best decisions for yourself and your portfolio.
Work with a Qualified Trading Coach
It’s tempting to DIY your options portfolio, but working with a coach who has a proven track record of success will greatly increase your shot at turning out with a favorable income. It’ll also let you see what trading looks like when it’s done well, which will make you a better investor on your own. You can learn from a book and read all the tutorials you want, but nothing replaces learning by example in a real-world scenario.
Option trading on the expiration date is a handy investment trick to have in your repertoire. Just make sure to keep these tips in mind.
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