How are options distinguished by their expiration cycles?
Options Distinguished By Expiration Cycles - Introduction
First of all, this is not something options traders need to know in order to trade options successfully.
Even though this is not essential options trading knowledge, it is answers one of the most commonly asked question by options beginners;
Why some stocks have options for some months while others doesn't.
There are 3 types of standardized options distinguished by their expiration cycles; Regular, Quarterlies and LEAPs.
Some stocks and ETFs have all 3 types of standardized options while some have only 1 type. Having different combinations of these options results in
stocks having options of different expiration months. This tutorial will explore each of these 3 kinds of standardized options distinguished by their
expiration cycles.
Options Distinguished By Expiration Cycles - Regulars
Regular options are the standardized exchange traded options that all optionable
equities carry. All
optionable stocks (ETFs and other
optionable instruments included) carries the current and next month options plus options with at least 2 other further
expiration months
for a total of 4 expiration months at any one time.
These 2 other expiration months are decided by the
"Expiration Cycle" that the stock is listed under. There are 3 expiration cycles; January Cycle, February Cycle and March Cycle. Each
cycle have options with expirations 3 months apart.
February Cycle - Feb options, May options, Aug options and Nov options
If a stock belongs to the January cycle, it would have the first 2 months, which is Jan and Feb options and then the Jul and Oct options in accordance to the January cycle. The tricky thing is that there is no way to tell which cycle a particular stock is listed under so all that options traders could do is to trade whatever options are available.
Most optionable stocks comes with regular options only. Only about 10% of the most popular stocks also come with LEAPs.
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Options Distinguished By Expiration Cycles - Weeklies
Weekly options, also known as "Weeklies", were introduced in the US market in October 2005. As the name suggests, weekly options are options that expires in one week. Weekly options are exactly the same as regular options except for their extremely short life span and they are currently (2007) listed in the CBOE for the SPX, XSP, OEX and XEO. Weeklies are listed every Friday and expires the following Friday.
Options Distinguished By Expiration Cycles - Quarterlies
Quarterly options, also known as "Quarterlies", were introduced in the US market on 10 July 2006. As the name suggests, Quarterly options
are options with quarterly expiration months and are listed for the nearest 4 quarters and the final quarter of the following year. The quarters are
Q1 Mar, Q2 Jun, Q3 Sep and Q4 Dec.
It is 25 September 2008 today and QQQQ have quarterly options listed for Q3 Sep 08, Q4 Dec 08, Q1 Mar 09, Q2 Jun 09 and Q4 Dec 09 (the final
quarter of the following year).
Quarterly options trades exactly like any other standardized exchange traded options except for the fact that it expires on the final trading
day of the expiration month and not on the 3rd Friday like regular options.
Quarterly options can be identified from their unique symbol names (QQQQ quarterlies have symbols starting with UQQ and OOF) and usually have their expiration months starting with the quarter symbol (example : Q1 Mar 08 instead of just Mar 08 for regular options).
As you can see, Quarterlies actually overlaps with March cycle options and that is why there is almost always an overlap. This is why there are often 2 sets of options with the same expiration month for these index ETFs.
Options Distinguished By Expiration Cycles - LEAPS
LEAPS, which is short for Long-Term Expiration AnticiPation Securities, was introduced in the US market
in 1990 for the purpose of leveraged stock replacement. LEAPS are equity options with expiration as far out as 39 months into the future
with January expiration only. LEAPS are identifiable by the the letter L, V, W, or Z in front of the stock symbol.
Unlike quarterlies, LEAPS expires on the 3rd Friday of the expiration month just like a regular option. In fact, LEAPS get converted into regular
options when the stock approaches January, ensuring that there are no overlap like the Quarterlies.
So far about 10% of the stocks in the US market have LEAPS listed.
Read the full tutorial on
LEAPS options.
Options Distinguished By Expiration Cycles - Illustration
So, let's use what we have covered so far to explain why 3 stocks today have options of different expiration months.
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Today is 25 September 2008. Let's look at the available options for QQQQ, MCD and HEES.
QQQQ - Q3 Sep 08, Oct 08, Nov 08, Q4 Dec 08, Dec 08, Jan 09, Q1 Mar 09, Mar 09, Q2 Jun 09, Jun 09, Q4 Dec 09, Jan 2010 MCD - Oct 08, Nov 08, Dec 08, Jan 09, Mar 09, Jan 2010 HEES - Oct 08, Nov 08, Feb 09, May 09 |
QQQQ is a March cycle ETF with regular options, quarterlies and LEAPS listed. MCD is a March cycle stock with regular options and LEAPS listed.
HEES is a February cycle stock with regular options only.
All 3 stocks have regular options listed which is why all 3 have Oct 08 and Nov 08 options.
Only QQQQ and MCD have LEAPS, which is why only they have Jan 09 and Jan 2010 LEAPS options listed.
HEES is a February cycle stock, which is why it is the only stock in the list with Feb 09 and May 09 options listed.
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