Equity Option Cycles

by: Kerry W. Given, Ph.D.

Beginning options traders often are confused about the organization of option chains. This paper covers the basic concepts surrounding which options are available at any given point in time, and how that may affect the options you trade.

Equity options always have options available for the current month and the following month. In addition, two more months will be available; but those two months will vary, depending upon which of three option cycles your option falls within: the January, February, or March quarterly cycles. For an option in the January cycle, Jan, Apr, July, and Oct are the months that will be used; for the February cycle, the months of Feb, May, Aug, and Nov are used; for the March cycle, the months of Mar, Jun, Sep and Dec are used. So, in January, for an option in the January cycle, the Jan and Feb options (current and next months) will be available plus two additional months: Apr and July.

By contrast, an option in the February cycle will have the following options available in January: Jan, Feb, May, and Aug. Similarly, an option in the March cycle will have the following options available in January: Jan, Feb, Mar, and Jun. We can illustrate how this works for a year with Apple Computer (AAPL) in the January cycle: In January, the Jan and Feb options (current and next months) will be available plus two additional months: Apr and July. In March, the Mar and Apr options (current and next months) will be available plus two additional months: Jul and Oct. In June, AAPL will offer the Jun and July options (current and next months) plus two additional months: Oct, and, since we have run out of months for the January cycle, we add Jan. Since AAPL offers LEAPS options, a new LEAPS option is added, and the nearest LEAPS option is converted to the January option with a new ticker symbol. For stocks without LEAPS options, the Jan option is added at that time. The root of the ticker symbol, the first three letters, is different for the LEAPS options; for example, with AAPL, the short term options all start with APV, as in APVFH for the June $140 calls. The LEAPS options use the root of VAA, as in VAAAH for the Jan 2011 $140 LEAPS call.

Index options are similar, but have some unique features. Most index options offer the front month plus the next two months, plus three more months from the March option cycle. However, several exceptions exist, e.g., the OEX has four near months available plus one more month from the March cycle.

In general, more months are available for index options because institutional traders use these options to hedge large stock portfolios. Check the web site of the exchange that produces the index option of interest for the details of the months offered, e.g., see the CBOE web site for SPX and OEX, but the ISE web site for MID, the S&P Mid Cap 400 index.

This is probably more detail than needed by the average options trader. The key information to keep in mind is that any equity options chain will always have options available for the front month, next month, and two additional months. Those additional months will vary depending on the option cycle of which it is a member. A smaller subset will also have the LEAPS options available.

Kerry W. Given, Ph.D., aka Dr. Duke, has over twenty years of experience investing in the stock market and over seven years experience trading equity and index options. He has taken many classes on investing and trading through the years and has discovered first hand how difficult it can be to separate the financial facts from the marketing hype, myths, and get rich quick schemes. He can be reached at: http://www.ParkwoodCapitalLLC.com