April 3, 2003

Stock Option Expiration Cycles
By John Brasher, CallWriter Publisher
 

Ever wonder why stocks don't always have options available for the same months? For example, you might notice one January that one stock has options trading for January and February, April and July. The next stock also has options available for January and February, but the farther months are May and August (not April and July). Whoops, a third stock has options available for January and February but the farther months are June and September! What gives?

Options expiration cycles seem a little confusing, but once you get their logic, they are easy to keep straight. When options first started trading in 1973, the Chicago Board Options Exchange (CBOE) decided that there would only be four months of equity options traded for each stock, but they wanted to make sure that some stock options were traded every month of the year. So, stocks originally were assigned to one of three cycles, either a January, February, or March cycle. The assignment was purely random and not alphabetical or tied to any fundamental data. Options on January-cycle stocks traded on the first month of each calendar quarter, February-cycle options on the second month of each quarter, and March-cycle options on the third month of each quarter. The following chart illustrates the original scheme of the three cycles:

Options became more popular over time, to the point that individual investors were trading them. But, having only 4 months of options available all year for widely traded stocks was a severe limiting factor in both speculation and hedging. For this reason the CBOE decided in the early 1980s that 1) options would trade on every stock all 12 months of the year, that 2) at any one time there still would only be 4 months of options available for trading on each stock, and that 3) the January, February and March cycles would be preserved, so that the same 4 months would not be available on all stocks at any given time. So, no matter which cycle a stock is in, options trade on the stock 12 months of every year. However, at any particular time, options don't trade for all 12 months of the year and you can only write options for the 4 available months, as explained below.

Available months refers to the months for which stock options can be traded in any particular month. At any time, four (4) different options are available on every stock, period. Notice that every month options are available on every stock for the current month (also known as the "front month") and the next month.

Example:  in July every stock will have options available for July (current month) and August (next month). The current month changes after option expiration day, which is the 3rd Friday of every month. So in our July example, after the 3rd Friday of July, the current month becomes August and the next month September. After the third Friday of August, the current month becomes September and the next month October.

The 3rd and 4th options available at any time after the current and next month will be 1 month in the following calendar quarter and 1 month in the second quarter out. Which month of the quarter? Ah, this is where we fall back into the JAN, FEB and MAR cycles. For a stock in the January cycle, it will be the first month of the quarter, for February the second month and for March the third month.

Example:  In the January expiration month (that is, before the 3rd Friday in January ends), every stock has options available for January (current month) and February (next month). But the 3rd and 4th options will depend on which cycle the stock is in, as the following chart indicates:

Wait a minute, you think, what happens after January expiration? What months trade then? You can't have September trading in January and the next month have the September options not trade, right? Right you are. Here is an example showing what happens when January rolls over into February as the current month:

Notice how the 3rd and 4th options didn't change? Still not clear? Then lets look at what happens when February rolls over into March as the current month:

Notice how in the January cycle July moved into the 3rd slot and October moved into the 4th? Notice how the 3rd and 4th months didn't change in the February and March cycles? Once an option becomes available to trade, it never stops trading until it expires.

The following master tables illustrate which options are available at any given time for stocks in each option cycle. For example, look at the January table and you will see that in August, options will be available for AUG, SEPT, OCT and JAN. This is how it works. Actually, these tables spell it all out for you, but the above explanation tells you how this (rather odd-looking) expiration scheme came about.

These tables do not include LEAPS®, which are stock options known as long-term equity anticipation securities. Equity LEAPS® expire in January of the specific year. By example, the 15 Oracle 2005 LEAPS® is the $15 strike for an Oracle LEAPS® that expires on the third Friday of January 2005. If you include the LEAPS®, then more than 4 months of options are available at any time on stocks. Expect for three (3) years of LEAPS® to be available at any time.

We hope this clears up options expiration cycles for you. If not, don't hesitate to send us an email.

Good luck and good trading!