What it is:
The expiration date is the last day an options contract can be exercised. After that, the contract becomes null and void.
How it works (Example):
When an options contract is written, the expiration date is specified as one of its terms. For equity options, this date is usually the third Saturday of the specified month of expiration. The contract's expiration date is the last opportunity the holder has to exercise the options contract. When the expiration date passes, the terms of the contract become void and the contract loses the entirety of its market value.
Why it Matters:
An option's price is made up of two main factors: intrinsic value and time value. Time value is directly related to the amount of time the option has before it expires. The longer an option has until its expiration date, the more time the underlying stock price has to move, which makes the option more valuable. As the contract moves closer to its expiration, the odds that the stock price will change are lower, and the option's value decreases.
Also, if an option is at or near its strike price near to its expiration, the volatility of the option will most likely increase.