Options are wasting assets. They have fixed lives and once they expire, they cease to exist. For that reason, it is important to understand, not just when the expiration is approaching, but also when the last day to trade that put or call is. For if the position is not closed out, then it will either expire worthless or be subject to auto-exercise. The last trading day can vary based on the type of options contracts or product. Here are a few guidelines that might help.

Once an option position is opened, it can be closed at any time through an offsetting transaction. Using Microsoft (MSFT) - Get Report as an example, if I buy 10 MSFT January 30 call options, I can exit or close the position by selling 10 MSFT January 30 calls. I can buy-to-open or sell-to-open new positions. After that, I can sell-to-close or buy-to-close to exit the trade.

If an option is in-the-money and the position is held to expiration, the contract will be subject to auto-exercise. If, for example, MSFT is trading for $31 on January 21, 2012, the January 30 call will be auto-exercised. It is in-the-money by $1. If you're long the call, you'll buy the stock at $30. If you're short the call, you will face assignment and be asked to sell 100 shares at $30 for every call option that you sold.

Options on equities like MSFT and on exchange-traded funds like the SPDR 500 Trust (SPY) - Get Report expire on the Saturday following the third Friday of the expiration month. For that reason, the last day to trade equity and ETF options is on the Friday before the expiration. If the position is not closed out by the close of trading on expiration Friday, it's too late. The contract will either expire worthless or be subject to auto-exercise.

Equity and ETF options also have the American-style exercise feature and can be exercised at any time prior to expiration. Therefore, if short a January 30 call on MSFT and the contract is in-the-money in the days heading into the expiration, you are at the risk of assignment. If assigned on the contract, you will be asked to sell the stock (have called away) at $30. At that point, it is too late to close the position out. The contract no longer exists. It has been exercised. (Click here for more tips on anticipating assignment of short options contracts).

While American-style option contracts can be exercised at any time prior to the expiration, European-style contracts are only exercised at the expiration. Many of the more popular cash indexes like the S&P 500 Index (.SPX), NASDAQ 100 Index (.NDX), and the Russell 2000 Small Cap Index (.RUT) have European-style options contracts. (Note that these symbols have unique ticker symbols - sometimes with a $ or .1 preceding the ticker, like $SPX or .SPX).

In addition, most cash indexes settle based on the opening prices of their components on the Friday before expiration. Since the settlement values for the options contracts are computed using Friday morning price, the last day to trade the options contracts is on the Thursday before expiration. If you wait until Friday, it's too late. The contracts will either expire worthless or be subject to auto-exercise.

There are a few exceptions to the rule. For example, options on the CBOE Volatility Index (.VIX) expire on a Wednesday, which is sometimes before or after the standard expiration depending on the month. Therefore the last day to trade VIX options is on Tuesday. Also, importantly, not all indexes settle European-style. For example, the S&P 100 Index (.OEX) has the American-style exercise feature. Finally, a handful of cash indexes stop trading on Friday before the expiration. For example, OEX and European-style S&P 100 Index (.XEO) options are still trading on the Friday before the expiration.

To summarize, the last day to trade equity and ETF options is on the Friday before the expiration and these contracts settle American style. If expiration is approaching and you don't want to deal with exercise/assignment, close the position through an offsetting trade no later than the Friday before the expiration. Many indexes settle European style and the last day to trade is the Thursday before expiration. There are exceptions like VIX and OEX options. If you're not sure, check the product specifications before you put a trade on. For most index products, the information can be found in the index section at the Chicago Board Options Exchange web site. If not, ask your broker for the Last Day to Trade for a given product.

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At the time of publication, Fred Ruffy held no positions in the stocks or issues mentioned.