The best expiration period for binary options. When can early expiration of put options be necessary? Exercise of the CALL option ahead of schedule

Expiration is commonly understood as the process of exercising an option. For exchange investors, specific dates and a calendar of such execution are of great importance.

The Russian stock market has special days on which options expire. Mostly every third Wednesday of a calendar month is the day of exercise of options for futures and shares. Mostly all third Thursdays - the moment of expiration for the MICEX, RTS indices, as well as the USD / RUB currency pair.

The American stock market has its own specifics of work. On it, the expiration time of options is mainly the third Friday of each calendar month.

Every investor should understand that options are not always exercised. This only happens when these financial instruments are in the “in the money” condition. In other words, an option will only be exercised when it has intrinsic value.

According to the exchange rules for the exercise of options, the process of expiration of the considered financial instruments is carried out automatically. Naturally, this procedure applies only to those options that have an intrinsic value.

At the same time, the trading system provides for a situation in which the investor can issue a refusal for automatic expiration. In order to exercise this right, he needs to enter a certain number of contracts, which should not be executed, in the existing order “Application for option exercise”. To do this, you need to use the minus sign.

That is, such refusals from expiration need detailing, which concerns the end client and the option series. The investor can opt out of automatic expiration up to the date of execution. To be exact, up to 18 hours 50 minutes. Taking into account that the date on which the expiration should take place began exactly at 19:00 hours of the previous working day.

The impact of expiration on the exchange

In the professional exchange community, various rumors are circulating that the most influential and large players often try to raise or lower the market just before the expiration time. Naturally, they choose a specific direction based on their own current interests, that is, towards previously open positions.

Indeed, it is difficult to disagree with such logic. At the same time, the desire of investors to calculate and use such artificially induced market fluctuations runs into obvious difficulties.

You shouldn't even try to identify and analyze the number of open positions in one direction or another using open interest in options. Investors trying to do this are missing one complication. It is connected with the fact that a large exchange player almost never trades on a single market. Many of its positions can be opened at the same time among futures, options and stocks.

Hence, we can conclude that options trading can be used by a serious player as a banal hedging of the main existing position. Based on this, one should not get carried away with the analysis of open interest in options in anticipation of an early expiration.

However, any medal always has two sides. There are also positive aspects in this situation. If the volumes of open positions change significantly in one day, it means that a significant movement can be expected in the market in the near future. After all, the actions of a big player never pass without a trace for the exchange.

Summarizing all of the above, we can say that on the eve of the exchange option expiration, sellers and buyers of options begin to actively fight for their potential profit.

It is because of this that market volatility increases significantly in the time period before expiration. The end result is always determined by who won: buyers or sellers.

The term "expiration" is applicable to binary options, where the main indicator is the time during which the transaction continues and completes. Expiration is the moment when the option expires and the player takes profit or loss. The duration of the transaction is determined by the trader based on the trading strategy, trading period, trading conditions (news, economic data), etc.

Depending on the chosen broker (IQ option,), a trader can either independently choose the option execution time (up to 30 seconds), or accept the broker's conditions, which sets the moment of completion of the transaction based on technical capabilities. Also, some brokers allow you to increase the expiration time for already open options.

Advice: when choosing a broker for trading, give preference to companies that allow you to increase the time for open options. This will reduce the risks if an open trade is at a loss at the time of completion.

Types of expiration dates

Binary options brokers offer a wide range of expiration times, from turbo options, where a trade lasts from 60 seconds to 5 minutes, to longer options of a month or more. Choosing the right moment to complete a trade plays an important role in binary options trading.

Newbies, as a rule, choose the timing of an option at random and unconsciously, without thinking about the current market situation and developing their own trading style. Novice traders most often use intraday trading, which is characterized by the opening of a large number of transactions with a short expiration time of options - from 60 seconds to 1-2 hours.

The profitability of trades in intraday trading is much lower than in long-term options, therefore, it is associated with increased risks. This type of trading is suitable for those traders who are confident in their knowledge and are not afraid to take risks. It is not recommended for beginners who want to get quick results and high profitability of their trades in a short time.

For traders who have doubts about choosing the correct expiration time for a trade, it is recommended to use b O longer term for options. With this approach, the number of transactions is reduced, which gives the trader the opportunity to more carefully assess the situation in the market.

Longer term options are less risky. When opening deals, you can rely not only on technical analysis, but also on economic news and other events in the world that may affect quotes.

The disadvantage of long-term trades is the lower percentage of reward compared to turbo options. For example, when trading options for 5 minutes, the trader will receive 85% of the invested amount, while when opening a deal for 24 hours or more, only 70%.

How to choose the right expiration?

When getting acquainted with financial markets, a trader faces many questions - what is it, etc. But the main question is how to choose the options expiration time to achieve the greatest profitability.

When using a ready-made trading strategy, there is no problem in choosing the option expiration time, it is indicated in the description of the strategy itself and has been verified by other traders.

In the case of creating your own strategy, you must adhere to the following rules:

• when choosing the duration of transactions, be guided by the working time frame on which the quotes are analyzed;
• choose the moment of completion of the transaction, equal to x3 or more candles of the working time frame;
• take into account the selected asset for trading, for indices and commodities - from 5 minutes to 1 hour, for currency pairs - from 1 hour to a month, for shares and other stock market instruments - from a week to a year.

Most traders choose an expiration of 3-5 candles on the working time frame. That is, if a trader analyzes a 5-minute chart, the transaction time will be 15-25 minutes. The duration of the option can vary depending on when the volatility of the currency pairs increases.

It is worth noting that the strategies originally developed for long-term transactions behave quite differently on small time frames. Analysis tools (indicators, advisors, etc.) designed for a longer period will have different indicators in medium and short-term trading. The combination of the described nuances should lead the trader to choose the optimal expiration time of transactions, which will correspond to his trading strategy and trading style.

Expiration - fulfillment of obligations of counterparties under concluded derivatives contracts. On the expiration date, the exchange carries out deliveries and settlements for all open positions in the futures and options market, and then the trades are held by the contracts following the execution date.

The due date is predetermined according to the exchange calendar. Most futures contracts are executed in March, June, September and December - they are called quarterly. The last trading day is usually between the 15th and 20th of the execution month. The exact date can be found in the contract specification on the exchange website. The actual delivery / settlement day is the first trading day after the last day of the contract.

The exceptions are OFZ contracts, which are executed on the 5th day of the month of execution, as well as oil futures, which are executed monthly on the first trading day of the month.

Options, depending on the underlying asset, are exercised weekly, monthly or quarterly. The due date may vary, but usually the last trading day also falls between the 15th and 20th of the month.

You can view the calendar of execution of derivatives contracts for the current year on the corresponding page of the Moscow Exchange. Calendar 2018 At the same time, for each specific contract, it is better to check the due date in the specification.

Why is it important to know expiration dates

All derivative contracts are in fact leveraged instruments. This means that in order to place a bet on 1 million rubles. it is enough to have only 100 thousand on the account. An example is conditional, the ratios may be different, but the essence is that the rates in the derivatives market are often much higher than the real funds of the traders.

On the due date, some players are in positive territory, while others are in negative territory. If during the period of circulation of contracts the market was calm and more or less predictable, then the volume of speculation is less, and most of the traders already have time to close positions or hedged with an opposite transaction on the underlying asset by the time of expiration.

However, if the circulation period was marked by high volatility, especially near the expiration itself, then on the last day of circulation, the volume of open positions may be large enough for participants to begin to influence the underlying assets market by their actions.

Technically, the impact can be different. Large holders of options on low-liquid assets with strikes close to the market price may try to "nudge" the quotes of the underlying asset for a short time due to their bids. Those who have already lost hope of gaining profit can begin to hedge their position with the opposite transaction on the underlying asset. Major players in the futures market can begin to hurriedly close positions, increasing the spread between the futures and the underlying asset, provoking an increase in arbitrage transactions.

It is difficult to predict how the market will behave on such a day. Intraday volatility can be very high, frequent sharp reversals are typical, and false signals of technical analysis that are misleading are also possible.

The situation can look especially confusing if the appearance of ambiguous news on the same day, which in its essence can cause a strong, but not obvious market reaction. Then the activities of "conscripts" are mixed with the actions of real investors, complicating the analysis of the impact of news on the market and forecasting future prospects.

Despite the strength of the influence of the expiration period on the underlying asset market, do not forget that it has a short-term character. As a rule, the market returns to its usual state the very next day, and strong price deviations can be compensated for.

However, investors should be careful about expiration dates so that unexpected volatility does not lead to unwanted triggering of stop orders or poor decisions. For day traders, it presents excellent trading opportunities. If you yourself are a participant in the derivatives market, then you just need to know these dates in order not to get into a difficult situation due to an unplanned closing of a position.

If you answer the question, what is the expiration of options in simple words, then this term denotes the moment of termination of this security. At this time, the holder must decide whether to exercise the right to buy or sell the agreed asset at a fixed price or let the contract simply burn out.

Execution time and early expiration

Timely expiration is called the execution time, and the period from the beginning of the contract until its end is called the execution time. By itself, the term "expiration" is often used to denote an early demand for the execution of a security. In such a case, the seller must immediately fulfill its obligation or reimburse the buyer for the full amount of income that he could have received from the sale of the asset.

Long term expiration is quite risky for both the seller and the buyer. That is why experienced players of the financial exchange, for whom the purchase and sale of securities is the main source of income, in most cases try to avoid early execution of the contract. However, in some situations, such a measure may be the only way to avoid large financial losses.

Why, in most cases, early expiration of call options is unprofitable?

Options are divided into two types: call and put. A call gives its owner the right to buy an asset, a put - to sell it. Such a different purpose also explains the differences in the concept of what the expiration of call and put options is and what it is fraught with.
When studying what call options are, one might get the impression that they are most often used ahead of schedule.
Calls are acquired in order to secure the right to buy a certain asset in the future at the price that is currently in effect. The investor is chasing profits from surges in the price of an asset. It turns out that when the price rises, it is better for him to immediately convert the security and get his income. In fact, experienced traders rarely do this, for the following reasons:

1) During the duration of the option, the risk of large financial losses is minimal.
At the moment when a trader exchanges a security for an asset, he will not get the desired profit so soon. First, he needs to find a buyer, and during the search, the market situation may change, for example, the asset will have time to fall in price. Then the whole point of buying and selling equity securities is lost. If the option premium is taken into account, the investor may even be in the red. Therefore, it is much better to wait for the due date and set the stage for the sale of the asset.

2) Accumulation of funds for the acquisition of an asset.
Most often, the contract is concluded at the moment when the investor does not yet have the required amount to purchase an asset. For example, a trader learns that in a couple of weeks the share price of one company will noticeably rise from 100 to 150 rubles. By acquiring more than 1000 shares now, he can make a profit of 150 thousand rubles in the future, but for this he needs to invest 100 thousand. He does not have such an amount in his hands, and even if it was, buying an asset is too risky. It is much better to buy a call option, and find the required amount before its execution. As a result, the investor receives a significant profit without unnecessary risks and costs. The only drawback is that paying the premium will reduce the potential profit.

3) Saving funds that could have been spent on the acquisition of the asset.

When concluding an option agreement, the buyer has a guarantee that he will receive his asset in any case, regardless of how its price changes. It turns out that until expiration, the funds prepared for the acquisition of the underlying asset can be put into circulation. This is exactly what experienced investors do most often: for them money becomes not easy bills, but a tool for making more and more profits.

The early expiration of options is a function that is useful under one condition - the due date for the payment of dividends is appropriate. This applies only to stock options, the main object of which is shares. As you remember from the introductory lessons of economics, the holders of the company's shares receive dividends at the appointed time - a part of the company's profit in proportion to the percentage of the number of shares owned by one investor to the total number of other equity securities of such a plan. By exchanging the contract for shares at this moment, the investor will receive dividends and can still sell the shares, while receiving an even greater profit.

When can early expiration of put options be necessary?

When a put option is concluded, the asset is in the hands of the holder of the security, and the seller undertakes to buy it at a set price. Most often, this is how investors insure their investments.
In the case of a put agreement, early expiration is also unprofitable, especially for the seller. On the other hand, the fast dividend payment period becomes a reason not to require early execution of the paper.
The expiration of the put option is necessary only when the price of the asset has reached its maximum point and will decline in the near future, but the contract has not yet expired. Waiting for the moment of execution, the investor will lose his profit every day, although he could have received it in full.

Risks and losses of the option seller during long-term expiration

Regardless of the reasons and time, expiration is always disadvantageous for the seller. His income depends on the premium - the option price, which the buyer pays at the beginning of the trade. The seller always expects that the holder of the security will never use it.
Any expiration is a financial loss. The seller will have to spend the funds to buy the asset or to recover the difference between the strike and the market price.
Prepare for such expenses in advance. None of the parties, until the end of the option, can be sure that the "rate" will work in its favor, so by the end of the contract, everyone is preparing for the worst. The seller sends funds to the reserve to cover possible expenses. If expiration occurred ahead of schedule, he may not be ready for such an outcome and he simply will not have the necessary funds.

Expiration of binary options

Binary options are very different from the usual understanding of the word. This difference manifests itself in all parameters of a financial instrument, including expiration.
A binary option is an option, the exercise of which depends on the correctness of the investor's forecast for an increase or decrease in the price of the underlying asset. One of the reasons for the popularity of such a financial market is the ability to quickly make a profit. The term of execution, as a rule, does not exceed one month, and most often does not drag on for several hours.

Types of binary options depending on expiration

Depending on the maturity date, such securities can be divided into short-term and long-term.

Short-term options

They are very popular among those looking for an easy and quick profit. Contracts are called short-term if the term of execution does not exceed one hour. Binary options "60 seconds" are very common, where you need to predict the behavior of the asset price in the next minute.

Long-term options

Short-term options can bring quick profits, but they are quite risky. It is extremely difficult to predict an increase or decrease in prices in the near future. But you can analyze the behavior of the asset in the last quarter and make a forecast for the next couple of weeks or month.
Experienced traders are fond of long-term options, for whom playing on the stock exchange is not just entertainment, but a full-fledged source of income.

Extending the expiration date of binary options

Some brokers allow their traders to move the expiration date. Many users actively use this opportunity, for example, if the investor is sure of the correct outcome of his bet, but did not guess the timing.
For the extension of expiration, the broker charges an additional fee of approximately 40% of the bet.
Taking into account the rather high price, the extended binary option rarely brings significant profit, it can only recoup the costs that the trader would have incurred if the option did not play.
It should be noted that changing the expiration time is possible only upward. It is too risky to give the trader the opportunity to demand early exercise of the option. Binary options are a very simple type of bet. The investor only has to predict whether the asset price will rise or fall. If we are talking about long-term investment, then early expiration can even bankrupt the broker. During the reporting period, the price may rise and, on the contrary, fall an unlimited number of times.

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You work and how often you trade, has a direct impact on the choice of the expiration period. Taking into account the peculiarities of forecasting price movements, the expiration period changes not only the profitability of the trade, but also the accepted risks. In this lesson, we will try to step by step consider all the generally accepted methods and rules designed to help in choosing the expiration time that is most suitable for your trading style or the conditions of a loved one.

What is the expiration of a binary option?

The expiration time determines the moment when the binary option expires. In fact, this means how long after placing the order you will wait for the result of the bet. Depending on the type of binary option or your broker, completely different expiration times can be used to place orders. At the same time, not all brokers allow changing the expiration period after the fact of the transaction. In this case, after buying the option and choosing the expiration time, you just have to wait for its completion. At the end of the expiration period, the trading platform will check if the current price of the asset meets the negotiated conditions. In case of a positive outcome, you get a certain percentage of payments, and if the conditions are not met, you lose the value of the option. Choosing the expiration time (using the example of the broker Grand Capital):

Types of expiration dates

Binary options brokers offer a variety of expiration times, from ultra-short (from 60 seconds) to a month or more. Differences in expiration times play an important role in both the amount of profit a trader can receive and the amount of investment risk. Therefore, it is important to approach the choice of expiration time with extreme caution. Beginners, as a rule, make this choice unconsciously, in an arbitrary way. But if understanding the market and developing your own trading style comes with experience, then it is important to know some of the features of binary options trading in advance.

When in doubt about the timing of the expiration, traders are advised to choose a longer period as this allows them to see the big picture. Focusing only on the most recent data is a common mistake. Here you can draw an analogy with a horse and blinkers in front of your eyes. The limited picture does not allow us to see the moment of the inception of the price trend and other factors influencing the formation of the asset's price. Sometimes it is useful to zoom out on the chart or move to a higher timeframe.

There is also an intraday type of trading. As a rule, such trading takes only a few hours a day and has its own analysis features. It is important to remember that short-term trading carries increased risks. This is especially true for ultra-short time frames in minutes and hours.

This type of trading is suitable for those who like to take risks and are not afraid to do it. Newbies are usually attracted by the prospect of getting a quick result and high profitability of such transactions. Unfortunately, the desire for quick earnings often only leads to losses.

In words, everything is quite simple. You just need to predict where the price will be in 60 seconds. In practice, however, this often turns out to be an extremely difficult task. Traditional technical analysis is of little help here. Relying only on macroeconomic indicators will also not work, most brokers prohibit trading short-term options during important news releases. Well, not all trading terminals are inclined to such a subtle analysis. In this case, the final result of the transaction largely depends on a successful combination of circumstances. The price remains the main thing for traders of any type. For example, if the price starts to fall, perhaps the right decision would be to bet on a decline in the rate. A break of the trend line will be a good signal:

Still, it is not in vain that many experienced traders advise starting their acquaintance with longer expiration dates. Long-term options are much less risky. When choosing long-term options, you can not rely at all on technical analysis, but more on economic news and other external events that somehow affect the price of an asset. Although long-term options are less risky, at the same time they do not promise extra high returns. Personally, I would advise you to choose some kind of golden mean. And, as experience is gained, an understanding will come about what expiration period should be chosen for a specific situation.

By expiration time, binary options can be divided into 4 categories. Let's try to analyze the features of different expiration dates of binary options, as well as their pros and cons.

The expiration period can also depend on the type of option. For example, unlike the European type option, the American option gives the right to shorten the expiration period, even when the trader has already started trading. This can be very useful in cases where you have made an obviously wrong decision or bought the wrong contract by mistake. Here you will most likely want to get out of a losing position as soon as possible and return at least part of the option value. Sometimes brokers provide such an opportunity, which to some extent serves as insurance against such situations. That is, if there is very little time left before the expiration of the contract, and it is already clear that the price will not reach the target, the best solution would be to reduce losses and close the deal in advance.

Some brokers allow you to delay the expiration time. It does this by replacing it with an option with a longer expiration date. If you assume that the price of an asset has not yet exhausted its full potential, you have the opportunity to extend the execution time of the transaction so that the price has time to reach its goal. In the event that there is a minimum of time left before the option expires, this may not be such a bad idea. It happens that just at this time some important news comes out, and the likelihood of achieving the goal greatly increases.

How to choose the expiration date of a binary option

If you are an adherent of short-term trading, then the choice of the expiration period should be made in favor of short trades. This will allow you to gain the necessary experience and master financial intuition in a short period of time. Also, the prospect of quick profit does not leave indifferent beginners. But, due to the complexity of this type of trading, novice investors are advised to choose longer expiration times.

Few people know that the choice of the expiry period is highly dependent on the asset being traded. This factor is often overlooked, and I think in vain. For example, for indices and commodities, shorter expiration periods are more appropriate. This is due to the fact that such instruments are more robust, which means that it becomes easier to make predictions for short periods of time. Plus, you can buy more contracts in a shorter amount of time, thereby making more money.

On the other hand, it is recommended to choose medium or long expiration for forex market instruments. All the same, exchange rates are subject to small, but frequent and unexpected price changes. At the same time, forecasting the exchange rate for a long period is much easier. Stocks in this regard are not very different. Therefore, for stock market instruments, you should choose an expiration period of several hours or more.

Dependence of the expiration period on the strategy

As a rule, the development of a trading strategy for binary options begins with the choice of the expiration period. Therefore, taking a strategy from the network, the task is greatly simplified.

There are some key factors to consider when choosing a trading strategy. First, do not forget that instruments behave differently on different timeframes. Therefore, strategies designed for a short term will have slightly different features than strategies for a medium and long term. The main difference lies in the types of analysis. Different types of analysis require different training and prior experience, which should be taken into account during the strategy selection phase.

Strategies using fundamental analysis will not work at short expiration times, because it is almost impossible to predict the consequences of a major event at a short expiration time equal to, for example, several minutes.

Short expiration times require more advanced strategies. For such time frames, traders usually use different forms of technical analysis. Unlike foundation, technical analysis is based on reading and interpreting charts and readings of various indicators.

For the correct interpretation of these values, some experience of working in the financial markets still does not hurt, so beginners usually start from the foundation.

In this case, for a successful transaction you only need to know the timing of the big news and its nature.

We are looking for entries 2 timeframes below

If you have expiration, let's say in an hour, then you need to look for entries on a chart of 15 minutes. That is, one timeframe below is half an hour, two timeframes below is 15 minutes. If you are trading D1 and your expiration is at the end of the day, then you are looking for entries on the H1 hourly chart. Again, this is not a hard and fast rule, but an empirical recommendation based on our own trading experience.

Beginners are sometimes very mistaken, and take a one-hour timeframe chart for displaying the price movement within one hour. In fact, it’s not like that! The hourly timeframe only means that it takes 60 minutes for one candle to form. And the chart, in fact, can display the price movement over weeks and months. This is especially important when using technical analysis. After all, analyzing the price movement for a month, you are unlikely to be interested in an hourly or five-minute target. This method lends itself to reverse calculation. For example, if you trade on a 5 minute timeframe, then the optimal expiration time for you will be half an hour or an hour.

Conclusion

From this lesson, we found out that choosing the right expiration time is very important to create a winning strategy in the binary options market. The difference in expiration times affects not only the profitability of your trade, but also the risks assumed. Also, don't forget about the importance of discipline. This will help you develop your own trading strategy and the use of different methods of analysis. In any case, before deciding on the choice of the expiration time, it will not be superfluous to first analyze the chart. If the price of an asset has only been falling over the past few weeks, it is obvious that many analysts will give a forecast in the direction of the continuation of the trend. But a more detailed technical analysis can reveal an important level of support or a signal for a price reversal, which an untrained trader may miss at first. Understanding the technical approach and even a basic understanding of charting will help you understand the key aspects of binary options trading. Also, the correct application of the option to change the expiration time will allow you to avoid unwanted mistakes, and, in some cases, to multiply your profit.

Best regards, Alexey Vergunov