Deciding to trade a stock option requires choosing an expiration date. Because option strategies require making modifications during the life of a trade, you need to know a stock's option cycle and in what months its options will expire.
The expiration month you choose will have a significant impact on the potential success of any trade, so it is important to understand how expiration months are assigned to each stock.
- CBOE equity options expire on the third Friday of the available month.
- Expiration months include the current month and the following month, plus two additional months drawn from the January, February, or March quarterly cycles.
- LEAPs are assigned a January expiry irrespective of cycle, with new January LEAPs added in September of every year.
How Options Cycles Work
To understand how options cycles work, it's necessary to revisit the history of the Chicago Board Options Exchange (CBOE). The CBOE was founded in 1973 and became the first market for options trading. At the time, stocks with options available were assigned to one of three cycles, each with four expiry months.
|Original options cycles and expiration months|
|Cycle||1st Quarter||2nd Quarter||3rd Quarter||4th Quarter|
The CBOE randomly assigned options cycles to each stock. Stocks in the January cycle had options expiring in the first month of each quarter. Stocks in the February cycle had options expiring in the middle month of each quarter. Stocks in the March cycle had options expiring in the final month of each quarter.
As options trading grew in popularity, the CBOE modified its rules to give every stock an option that expired in the current month (also called the front month) and an option expiring in the following month, in addition to two months further out (known as the back months). So the two near-term months are available, plus two months from the January, February or March cycles.
For example, below is the monthly options schedule for stocks assigned to the January cycle.
|January options cycle|
|Front Month||Next Month||1st Back Month||2nd Back Month|
So if the present month is June, the month with the nearest expiration is June, followed by July, October and January. Note how in the January cycle, the back expiration months will always correspond to the months originally assigned to the cycle: January, April, July or October.
It is the same for the February cycle. The front month and following month are available, in addition to two months further out—i.e. February, May, August or November, whichever is closest. In the March cycle, the front month and following month are available, along with two additional months (March, June, September or December, whichever is nearest).
At minimum, each stock with options available for trading will have at least four expiry months available. With monthly options, the expiry date is on the third Friday of the given month.
Some stocks, if they are heavily favored among investors, will have options that are known as long-term equity anticipation securities (LEAPS). If a stock has LEAPS, then more than four expiration months will be available.
LEAPS have expiration dates that are a year away or longer, typically up to three years. The expiry date is on the third Friday of the expiry month. The contracts are ideal for investors looking for prolonged exposure.
All LEAPs are assigned a January expiration month, irrespective of cycle. New January LEAPs are added in September every year. For example, January 2022 LEAPs for all eligible stock and ETF options were added on September 16, 2019.
Subsequent LEAP months may also be added. For example, LEAP options for Tesla (TSLA) include the expiry months of January 2022, March 2022, June 2022, and September 2022.
The Bottom Line
Expiration cycles for stock options may seem a bit confusing, 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 cycles is just one more way to help you increase your success rate when trading options.
U.S. Securities and Exchange Commission. "Joint Industry Plan; Order Approving the Fourth Amendment to the Plan for the Purpose of Developing and Implementing Procedures Designed to Facilitate the Listing and Trading of Standardized Options," Pages 2-3.
Cboe. "Cboe History."
Nasdaq. "TSLA Option Chain."