In the investment world, options are derivative instruments that create a contract between buyers and sellers concerning the trading of an asset at a specified price. By purchasing the contract, you are given the right, but not the obligation, to pursue a specific transaction on the asset.
When selling the contract, you are obligated to carry out the transaction at the purchaser request. An option’s price is derived from the difference between the reference price and the worth of the underlying asset, plus a premium that is based on the remaining time until the expiry of options.
Every options contract has an expiration month, giving it a limited useful lifespan. This date represents the day on which the contract can no longer be exercised, as it becomes invalid. For all US stock options, the expiry on options falls on the third Friday in the month the option expires.
The exception to this is when the third Friday is also a holiday, in which case, the expiration date is moved forward to Thursday.
When you decide to trade a stock option, you are required to choose an expiration month. Due to the fact that option strategies necessitate making adjustments during the life of a trade, you need to know in what months the options will expire.
The expiration month you decide on will have a substantial effect on the potential success of any option trade, so it is critical to understand how the exchanges decide what expiration months are available for each stock.
Expiry Of Options Cycles
You may have noticed that not all stocks have the same expiration months available. Stock options are put into one of three expiration cycles. In the first cycle, January, April, July, October (the JAJO cycle), the first month of each quarter are the expiration months.
The second cycle, the FMAN cycle, consists of expiration months February, May, August and November. The expiration months for the third cycle, the MJSD cycle, are March, June, September and December.
There are at least four various expiration months are on hand for every optionable asset. In 1973, when stock options first started trading, the CBOE decided that there would only be four months available for trading options.
This structure was altered later on, as options trading became more fashionable, to provide for investors’ need to utilize options for short-term hedging. This altered system guarantees that two near-month expiration months will always be useable for trading options. The following two expiration months further out will still rely on the expiration cycle that was given to the security.
Determining the Expiration Cycle
The only way to find out the assigned expiration month for a stock is to infer from the expiration months that are presently open for trading, as there is no pattern set as to which expiration cycle a specific optionable stock is assigned.
In order to do that, you must look at the third open expiration month and find out which cycle it belongs to. You can usually tell from the third expiration month available. Just keep adding three months to the third month until you reach January, February or March.
The reason you need to double check January is because LEAPS expire in January and if the stock has LEAPS listed for trading, then that January expiration month is the additional expiration month added for the LEAPS options.
Option-expiration cycles for stocks may appear to be a bit puzzling, but if you take a little time to understand them, they become second nature. Because you may need to make adjustments during the life of a trade, it can be very important to know what expiration months will become available in the future
Understanding the expiration cycle is just one more way to help you increase your success rate when trading options.
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