Master the Art of Options Trading: Understanding Option Cycles
Option cycles refer to the expiration dates assigned to various classes of options. Newly listed options are randomly assigned to cycles, aiming to distribute expirations across different time frames. Recognizing an option’s cycle is crucial as it informs investors of the expiry timeline if the option is not exercised. This cycle is also known as the expiration cycle.
Key Takeaways
- Option cycles are the specified months in which a company’s quarterly options expire.
- Most options series are assigned one of three cycle assignments upon listing.
- Higher option volume and open interest often occur on the dates of these assigned cycles.
How Option Cycles Work
An option cycle represents the recurring months available for a listed option class. These cycles, regulated by authorities, are prevalent across options and futures markets. Typically, investors examine options classified by option class, categorized into calls or puts based on a particular security. Each class further divides by strike prices and arranges sequentially as per expiration.
Option Cycle Assignments
Options are designated into one of three cycles when listed. Initially spread over four months, regulatory changes in 1984 revised this setup. Options now list two front months followed by the subsequent months in their cycle:
- JAJO - January, April, July, October
- FMAN - February, May, August, November
- MJSD - March, June, September, December
For instance, options on the January cycle offer contracts during January, April, July, and October. Options in the February cycle appear in the mid-quarter months, while March cycle options manifest in the termed final month of each quarter.
When investing, individuals will encounter the first two front months followed by two additional cycle months, allowing short-term trades or long-term contracts.
Special Considerations
With the advent of weekly options, the specific cycles carry lesser weight for heavily traded stocks and index-tracking ETFs. An investor now has the flexibility to roll a quarterly option to almost any desired week of the year.
It remains essential to understand the rotation of cycles with the passage of months. Option cycles continually refresh with the two immediate months, trailing originally assigned cycles over the longer term. Thus, observing the third and fourth months is crucial to deducing the cycle. Typically, all options expire at 4:00 PM Eastern on the third Friday of their expiration month.
Less Common Expiration Cycles
In rare instances, underlying securities like ETFs, including the S&P 500 funds, offer contracts for every month. These highly liquid assets, usually engaged in portfolio hedging due to their index nature, result in well-maintained target strike prices, justifying the frequency of expiration opportunities.
[Long Term Equity Anticipation Securities (LEAPS)] are distinct in their longevity, expiring each year in January, at least one year beyond purchase. Apart from their extended expiry, LEAPS function similarly to regular securities options, accessible as calls or puts across countless equities and selected index funds.
Related Terms: options trading, calls, puts, LEAPS, hedging, expiration dates.
