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Current time:0:00Total duration:3:27

Video 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 saying the same in every way except one is going to have a further out expiration date so let's compare let's compare this call option right here so this is a call option on GE with a seventeen dollar strike price so it's the option to buy GE stock at $17.50 compare that with the the same the an option that has the same strike price but has a December 2011 expiration so we're going to look for seventeen dollar strike price right over here and you can see right when you compare the options that the one that has a further out expiration costs more this one costs three dollars and twenty-five cents while this one only costs two dollars and 36 cents and the reason why it costs more is because you have you get to retain the option for longer so you can imagine seventeen dollars let's say that seventeen dollars is right over here let me draw a hypothetical stock chart so let's say that seventeen dollars is right over here and so you could imagine let's say that you have both of those options or you have the option to have either one of those options and let's say that the stock does something let's say that the stock does something like that well it's going to be in the money you have the right if you own either one of those options if you either one of those options you have the option to buy the stock at $17.50 2011 option has or you can hold the option and maybe see if the stock continues to go up or you can imagine a downside scenario someone who has maybe the stock does something like this where it goes out of the money someone who holds the closer dated option the one that that expires first they'll be completely out of the money the option would be worthless on this date but if you have the up if you have the the longer expiration if your option does not expire until December of 2011 then you can hold it and maybe maybe the stock will do something nice there's some probability that it will one day become in the money and I want to make it clear even if you have the situation here and you hold the longer dated option you have the option that's going to expire in December you still would not want to exercise it because there is someone who would still enjoy all of this optionality of the future so what you're better off doing instead of exercising the option you're better off selling the longer dated option right over there and you should be able to capture at least as much profit as you would from exercising the option plus capturing whatever value you're the buyer sees in the future optionality