Key Takeaways
- Option cycle sets recurring expiration months.
- Three main cycles: January, February, March.
- Near-term months always available for trading.
- Time decay speeds up near expiration.
What is Option Cycle?
An option cycle refers to the recurring schedule of expiration months during which options contracts on an underlying security are available for trading. These cycles were originally structured by the Chicago Board Options Exchange (CBOE) to organize listings and manage market liquidity efficiently. Understanding option cycles helps you identify which monthly or quarterly options are accessible for a given stock, such as Apple.
Option cycles dictate when contracts expire and are crucial for timing trades, especially for strategies involving call options or puts.
Key Characteristics
Option cycles organize expiration dates into structured groups that repeat quarterly. Key traits include:
- Three main cycles: January, February, and March cycles rotate options availability across quarterly months.
- Expiration dates: Typically, options expire on the third Friday of their designated month, with some weekly and early exercise possibilities.
- Near-term availability: All stocks offer options for the current and next month, plus two months from their assigned cycle.
- Liquidity concentration: Most trading volume focuses on near-term expirations, enhancing market efficiency.
- Extended cycles: Long-term options can extend up to two years, allowing for broader strategy planning.
How It Works
When options trading began, the CBOE assigned stocks to one of three option cycles to limit the number of expiration months available, managing market complexity. For example, a stock in the January cycle will have options expiring in January, April, July, and October. This systematic rotation allows traders to plan positions around predictable expiration timelines.
Modern markets also offer weekly options and specialized contracts like 0DTE (zero days to expiration) that expire the same day, providing flexibility and opportunities for active traders. The option’s value at expiration depends on the underlying stock's price, such as SPY, and whether the contract finishes in or out of the money.
Examples and Use Cases
Option cycles support diverse trading and hedging strategies. Consider these examples:
- Airlines: Apple options often show high liquidity in near-term cycles, ideal for short-term hedging or speculation.
- Covered calls: Investors may write covered calls by selecting option expirations within the cycle to balance income with risk, such as targeting February calls on a February cycle stock in January.
- Volatility trading: Traders use different expiration cycles to exploit implied volatility changes across months, adjusting positions accordingly.
Important Considerations
When using option cycles, be mindful of time decay and risks like tail risk, which can affect option premiums as expiration approaches. Understanding the cycle can help you avoid unexpected expirations and optimize entry and exit points.
Review the specific option chain for your underlying asset to confirm available expiration months, since cycles can vary and weekly or monthly expirations may add complexity to your trading plan.
Final Words
Option cycles organize option expirations into predictable schedules, impacting liquidity and strategy timing. Review the option cycles for your target securities to align your trading or hedging plans with the most active expiration months.
Frequently Asked Questions
An option cycle is the recurring schedule of expiration months during which options contracts for a specific underlying security are available for trading. These cycles were originally established by the Chicago Board Options Exchange to organize option listings into three main groups based on quarterly expiration months.
Option expiration cycles designate which months have listed options for a stock, typically including the current month, next month, and two additional months from the stock's assigned quarterly cycle. Options usually expire on the third Friday of the expiration month, after which they become invalid.
Stocks are assigned to one of three option cycles: the January cycle (January, April, July, October), the February cycle (February, May, August, November), or the March cycle (March, June, September, December). This system helps manage option listings and expiration schedules.
Yes, since 1990, exchanges have expanded options availability to include the current month and the next month for all stocks, plus two additional months from their assigned cycle. This allows traders to access more expiration dates beyond just the quarterly cycle months.
Besides standard monthly expirations, markets also offer weekly options that expire every Friday for select securities and 0DTE options that expire the same day they are traded. These shorter-term options attract high trading volume due to their liquidity and flexibility.
At expiration, the option’s value is determined by the underlying asset's settlement price, usually the closing price on the last trading day. In-the-money options may auto-exercise into shares, while out-of-the-money options expire worthless.
Time decay, or theta, accelerates as options approach expiration, which reduces the value of option buyers but benefits option sellers. This makes near-term options sensitive to time erosion, impacting trading strategies.
No, the option cycle refers only to the expiration schedule of options contracts. The full option trade life cycle includes order placement, exchange matching, clearing by the OCC, settlement, and potential exercise or assignment.
