WHAT IS Expiration Cycle

The expiration cycle is the calendar cycle of expiration months that is assigned to basic exchange-traded stock options. Options expire after three, six or nine months, except for long-term options. With a few exceptions that have contracts in every month, most equity options are set up on one of three cycles. Knowing which cycle an option is on tells you when the option can expire if not exercised.

BREAKING DOWN Expiration Cycle

Expiration cycle is the name for the cycle determining when stock options expire. An option allows the purchaser to buy or sell stocks at a given price under certain conditions, which is called exercising the option. If the holder of the option does not exercise the option, it expires at a set time. When an option expires is determined by which expiration cycle it is on. There are three cycles for most exchange-traded stock options:

Cycle 1: January Cycle. Expirations in January, April, July, October (the first month of each quarter)

Cycle 2: February Cycle. Expirations in February, May, August, November (the second month of each quarter)

Cycle 3: March Cycle. Expirations in March, June, September, December (the third month of each quarter)

With single stock options, a given strike price that once seemed valuable can quickly become obsolete, such as a $25 strike price in a call option on a stock that drops suddenly from $27 to $15 over the course of a month. For this reason, single stock options are on regular expiration cycles.

Less Common Expiration Cycles

Some options may have contracts in every month of the year, but this is usually reserved for highly liquid underlying securities, such as exchange-traded funds (ETFs) on the S&P 500 and other index funds. Options such as these are often used to hedge a portfolio and, because they represent a basket of stocks, the security underlying the option is more stable. The strike prices, or target prices, tend to hold up better as a result, so it makes sense to have more and more frequent expiration date possibilities. These may trade on Cycle 4, Cycle 5, or Cycle 6.

Long Term Equity Anticipation Securities (LEAPS) are options for much longer terms, and as such, they expire every year in January, at least one year after purchase. They are otherwise the same as other securities options, and are available on thousands of equities and a select group of index funds as either calls or puts. The only difference between LEAPS and regular options is the length of time before they expire.