Option Expiration Cycles

Expiration Cycles

Stock options trade in one of three quarterly cycles: January, February or March:

Option Month Cycle What it really means:
January Cycle First Month of the quarter
February Cycle Second Month of the quarter
March Cycle Third Month of the quarter

Permitted Option Months:

At any one time, only four different expiration months will be available on a stock for a single option series, not counting LEAPS options. Options eventually will be available for every month, but only four expiration months can be open at any one time, a remnant of how options began trading back in the 1970s. Every optionable stock will have options trading for both the current (front) and following (near) month. The following table shows the four option months available at any time:

Front Month Current option month
Near (Next) Month The month immediately following front month
Third Month Next Quarterly Cycle Month
Fourth Month Next Quarterly Cycle Month


Expiration Examples:
In each of the following examples, assume that it is now APRIL 2, thus APRIL is the current month (the “front month”) – the next option month to expire. Since each stock can have only four months of standard (non-LEAPS) options trading at any time, it is helpful to know which ones they are.

Figure 2.13

January Cycle (1st Month of the Quarter)       EX: Options Available on April 2nd

JAN FEB   MAR APR   MAY     JUN JUL     AUG   SEPT OCT   NOV DEC


February Cycle
(2nd Month of the Quarter)               EX: Options Available on April 2nd

JAN FEB   MAR APR   MAY     JUN JUL   AUG   SEPT OCT NOV DEC


March Cycle
(3rd Month of the Quarter)         EX: Options Available on April 2nd

JAN FEB   MAR APR   MAY     JUN JUL   AUG     SEPT OCT NOV   DEC

As noted, every optionable stock will always have options trading for the current and near month. This is why, by the end of the year, options on a stock will have traded for all twelve expiration months, because at some point each month will in turn have become the near month and then the front month. The third and fourth months will be the next two months in the cycle. The following table lists the four months in each of the monthly cycles. Note that each month listed in a cycle is the first (January) month, second (February) month or third (March) month of the calendar quarter. Once we know which cycle the stock is in, we know that the next two expiration months available after that will be the next two months (either the first, second or third month of the quarter) in that cycle:

January (1st) Cycle February (2nd) Cycle March (3rd) Cycle
January February March
April May June
July August September
October November December


Example:
If the front and next months are MAR and APR, and we know the stock is in the January cycle, the next two expiration months available for the stock will be JUL and OCT, because JUL and OCT are the next two months in the January cycle sequence.

If we do not know in which cycle a company’s options trade, a quick look at an options chain to see available months will quickly reveal it. Look at the two months following the current and next month (that is, look at the last two months available): whichever month of the calendar quarter they are (1st, 2nd or 3rd) will tell you whether the stock is in the January (1st), February (2nd) or March 3rd) cycle. In the above example, the fact that the last two months are July and October (1st month of quarter) tells us these options are in the January cycle.

Relevance of the Option Cycle

Suppose that in February you wrote the March calls. If you are not called out at March expiration you would then be in the April expiration month, and April and May options would be available. If the stock is in the March cycle, the next furthest month you could sell is June. If in the January cycle you could write July calls. However, if the stock were in the February cycle, the next month out available would be August; if August did not provide enough premium, December would be the next month available, which is pretty far out in time. This is not a huge concern, but when writing I do keep half an eye on the available months. This is not normally a concern for the conservative writer, however.

LEAPS: Long-Term Equity Anticipation Securities

These are simply stock options with expirations longer than 9 months. There are both call LEAPS and put LEAPS. Expirations for LEAPS can be as far as 39 months out in time when new LEAPS first are added. LEAPS trade with different symbols than regular stock options and each year has separate symbol. LEAPS options expire in January at the same time as regular stock options. For example, the 2017 LEAPS calls will expire on the Saturday following the third Friday of January 2017.

LEAPS Conversion Rule:

When time naturally brings a LEAPS option into the normal option expiration cycle, it becomes the regular January stock option and its symbol changes from the LEAPS symbol to the appropriate symbol for the January stock option (A-L for calls, M-X for puts). In other words, LEAPS call and put options eventually become the regular listed call and put options.

In the examples below, the nearest LEAPS calls and puts (expiring in January the following year) will become the regular calls and puts in May, June or July, as shown below. The month underlined is the month in which the nearest LEAPS option becomes a regular stock option and its symbol changes.

When LEAPS Convert to Regular Options:

Figure 2.14

January Cycle (1st Month of Quarter)                     Conversion of LEAPS to Regular Options

JAN   FEB MAR APR   MAY   JUN JUL     AUG   SEPT OCT NOV   DEC


February Cycle
(2nd Month of Quarter)       Conversion of LEAPS to Regular Options

JAN   FEB MAR APR   MAY   JUN JUL     AUG   SEPT OCT   NOV DEC


March Cycle
(3rd Month of Quarter)                        Conversion of LEAPS to Regular Options

JAN   FEB MAR APR     MAY   JUN JUL  AUG     SEPT OCT   NOV DEC

For example, this table shows how in May 2008, the 2009 LEAPS options will convert from LEAPS options to regular listed options and simply become January options. The 2009 LEAPS options convert in June for companies in the February cycle and in July for companies in the March cycle.

We noted above that stocks always have options for four different expiration months available at any one time, excluding the LEAPS options. But when this conversion occurs of LEAPS to standard options, however, the converted option briefly becomes a fifth available expiration month for the stock.

The strike prices for the converted LEAPS do not change, of course. This is why we see a stock such as railroad CSX, which has options available in one-dollar strikes for 11 months of the year, having January options in so-called LEAPS strike prices that are either the standard $2.50 or $5.00 apart.

It occasionally happens that a call writer would prefer to roll an existing short call (ex: $31 strike) out to the January expiration month. However, January offers either a $30 or $32.50 strike, but not a $31 strike, so a roll straight out to January is not possible.

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