Options & Derivatives Trading

option cycle

What is an option cycle?

Option period refers to the expiration date that applies to different classes of options. Newly listed options are randomly assigned a period to spread options widely across different time frames. It is also called expiration period.

With a few exceptions with monthly contracts, most stock options are set on one of three periods. Knowing which cycle an option is in can tell you when the option will expire if not exercised.

key takeaways

  • An option cycle is the collection of months in which a company’s quarterly options expire.
  • One of three cycle allocations is assigned to most option series when the stock goes public.
  • Those options that expire on a specified option cycle date typically have greater option volume and open interest.

How the Options Cycle Works

Option cycle refers to the monthly cycle for which the listed options category is available. Option cycles are integrated in all options and futures markets. Cycles are regulated by regulators. Investors typically look at available options by option category. An option class is a set of call or put options available on a security.

The options class is separated by call options and put options. They are also categorized by strike price and listed in order of expiration.

Option Cycle Allocation

Options are assigned to one of three periods in its list. The initial cycle is divided into four months. In 1984, regulators decided that listed options should be available to their investors for the first two months. This changes the options list to include the first two months into the next two months in the cycle.

Listed options can be allocated in the open market into three options cycles:

  1. JAJO – January, April, July and October
  2. FMAN – February, May, August and November
  3. MJSD – March, June, September and December

Note that January-cycle options have contracts available in the first month of each quarter (January, April, July, and October). The options assigned to the February cycle use the middle months of each quarter (February, May, August, and November). Options in March Cycles Options are available during the last month of each quarter (March, June, September, and December).

Investors looking for investment options will find the first two months followed by the remaining two cycle months. This provides investors with the opportunity to trade or hedge short-term contracts as well as buy long-term contracts.

special attention items

It should be noted that these days, cycles are less important for heavily traded stocks and index-tracking ETFs due to weekly options release. Since weekly options can be traded, investors who want to extend the expiration date can roll quarterly options to any week of the year.

It’s also important for investors to understand what’s going on one month past cycle. The first two months of each cycle are always available. After one month has passed, the remaining final two months continue to follow the cycle originally allocated. For example, in February, the available cycle one options would be February, March, April, July. In June, the available cycle one options will be June, July, October, and January.

Overall, to give an investor an idea of ​​which cycle options are traded in, it is worth looking at the third and fourth months. Generally, all options will expire at 4:00 PM ET on the third Friday of their expiry month.

Less common expiration cycle

Some options may have contracts for each month of the year, but this is usually reserved for highly liquid underlying securities, such as the S&P 500’s exchange-traded funds (ETFs) and other index funds. Options such as these are often used to hedge portfolios, and since they represent a basket of stocks, the underlying security of the option is more stable. As a result, strike or target prices tend to hold better, so it makes sense to have more and more frequent expiration possibilities.

Long-Term Equity Expectation Securities (LEAPS) are longer-term options, so they expire in January each year, at least one year after purchase. They are otherwise identical to options on other securities and can be used on thousands of stocks and a select group of index funds, as either a call or a put. The only difference between LEAPS and regular options is the length of time until expiration.

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