Option expiration and price | Finance & Capital Markets | Khan Academy

TL;DR

Options with longer expiration dates are more expensive because they allow the holder to retain the option for a longer period.

Transcript

Let's explore a bit how the price of an option can vary, or how it can relate to the actual expiration date. So what I'm going to do is compare two similar options with the underlying stock being General Electric. And they're going to be the same in every way, except one is going to have a further out expiration date. So let's compare this call opt... Read More

Key Insights

• 🧑‍🤝‍🧑 Options with longer expiration dates are more expensive because they provide the holder with the ability to capture future price movements.
• 😚 Closer-dated options require immediate exercise or expiration, limiting the opportunity for future gains.
• 🧑‍🤝‍🧑 Longer-dated options offer flexibility and potential future profitability if the stock price moves favorably.

Questions & Answers

Q: Why is the option with a longer expiration date more expensive?

The option with a longer expiration date is more expensive because it provides the holder with the opportunity to benefit from future price movements of the underlying stock.

Q: What happens if the stock price goes above the strike price?

If the stock price goes above the strike price, the holder of either option can exercise it and make a profit by buying the stock at the strike price and selling it at the higher market price.

Q: What happens if the stock price goes below the strike price?

If the stock price goes below the strike price, the closer-dated option would expire worthless, while the longer-dated option still holds some potential for the stock price to recover in the future.

Q: Is exercising the longer-dated option always the best choice?

No, it is often more advantageous to sell the longer-dated option rather than exercising it early, as the buyer of the option sees value in holding it for its future optionality.

Summary & Key Takeaways

• The video compares two options on General Electric stock, one with an April 2011 expiration and another with a December 2011 expiration.

• The option with the longer expiration date is more expensive because it offers the holder the opportunity to capture future price movements of the stock.

• Options with closer expiration dates require immediate exercise, while options with longer expiration dates allow for potential future gains.