In the context of derivatives, such as futures and options contracts, the term “expiration date” refers to the date on which the contract ceases to be valid. The expiration date is a crucial aspect of derivative contracts, as it defines the period during which the contract can be exercised, traded, or allowed to expire.

Here’s how the expiration date works in different types of derivatives:

1. **Options Contracts:**
– For options contracts, there are two types of expiration dates: the expiration date and the last trading day. The expiration date is the day when the options contract officially expires, and the right to exercise the option is no longer valid. Options can be European or American-style, and this influences the exercise provisions:
– **European Options:** Can be exercised only at the expiration date.
– **American Options:** Can be exercised at any time up to and including the expiration date.

– The last trading day is the final day on which the option can be traded in the market. It occurs before the expiration date and varies depending on the exchange and the type of option.

2. **Futures Contracts:**
– Futures contracts also have an expiration date, which is the date on which the contract is settled. Unlike options, futures contracts are standardized agreements to buy or sell an underlying asset at a predetermined price at a future date. The expiration date is the date when the contractual obligation is fulfilled.

– Futures contracts can have various expiration months. Traders need to be aware of the specific expiration date for the contract they are trading. After the expiration date, traders may need to roll their positions to a new contract if they wish to maintain exposure to the underlying asset.

3. **Expiration Cycle:**
– Derivatives, especially options, typically follow specific expiration cycles. The most common cycles are monthly, with options expiring on the third Friday of each month. Additionally, there are quarterly cycles and longer-term options known as LEAPS (Long-Term Equity Anticipation Securities).

4. **Expiration Process:**
– On the expiration date, the options or futures contract may be settled through physical delivery (for commodities) or cash settlement. For options, holders need to decide whether to exercise their rights. Traders with profitable positions may choose to close out their positions before the expiration date to avoid the risk of exercise.

5. **Rolling Positions:**
– Traders who wish to maintain their positions beyond the current expiration date can engage in a strategy known as “rolling.” Rolling involves closing out an existing position in the expiring contract and simultaneously opening a position in a contract with a later expiration date.

6. **Options Series:**
– Options on a particular underlying asset may have multiple expiration dates and strike prices, creating a series of options contracts. Traders can select from different expiration dates based on their trading strategies and market expectations.

Understanding the expiration date is crucial for derivatives traders and investors. It impacts the strategy, risk management, and decision-making process. Traders need to be aware of the specific rules and characteristics associated with the derivatives they are trading to effectively navigate the expiration process.