The Importance of Your Option Expiration Date

The importance of the option expiration date cannot be understated. If you do not have a good grasp on expiration dates, you run the risk of letting your options expire and they become worthless. Stock options normally begin trading  around eight months before their expiration dates. Because expiration dates are cyclical, some options are only operative for a month or two.

An option can be bought or sold with one of four possible expiration dates. These dates are designated on the expiration cycle table. Equity options typically expire on the Saturday following the third Friday of the expiration month. If this Friday is a holiday, the expiration is on the Friday. This is why when you look at options prices, you will only see a month listed. If  the option is not exercised, then the margin charged is released.

For European style options, the expiration date is when an in the money options contract (an option that is making money) will be exercised. With U.S. style options, the option expires on the last day the options contract can be exercised. Buyers of options want their contracts to be in the money on the expiration date. Options sellers want the options that they sold to be out of the money on the expiration date.

Expiration Cycles

There are three expiration cycles and your option can belong to one of them. The first cycle is the JAJO cycle. In the JAJO cycle, the expiration months are the first months of each quarter. These months are January, April, July, and October. The second cycle is the FMAN cycle. The expiration months on this cycle are the second months of every quarter. These months are February, May, August, and November. The third cycle is the MJSD cycle. The expiration months on this cycle are the third months of each quarter: June, September, and December.

When options were first offered in 1973,  the only expiration dates that were available to the option were on the expiration cycle assigned to stock that the option referred to. However, this system was modified later because there was a very high demand for hedging options in the short term. The system in place now makes sure that there will be at least two expiration months  available for trades to be made. There might be more months available depending on the stocks expiration cycle.

Your Options Cycle

There is no set expiration cycle for any option. In order to find out the expiration cycle, you have to find out the expiration months that are currently available for trading. In order to find out this information, look at the third available expiration month. Then, look at the cycle it belongs to. If the third expiration month is in January, you must use the fourth expiration date to check which cycle it belongs to.

blog comments powered by Disqus