What Is an Option Cycle?
Key takeaways
– An option cycle (or expiration cycle) is the set of months in which a listed option class has standard monthly expirations.
– Most equity options fall into one of three standard cycles that determine the 3rd and 4th months available at listing; the two nearest months are always listed in addition.
– Weekly options, LEAPS, and highly liquid issues can alter the practical importance of the traditional cycle.
– Always check the option chain/contract specs for exact expiration times and exercise/assignment rules before trading.
What an option cycle is
An option cycle defines which calendar months a particular option class will have standard monthly expirations. When an option class is first listed, exchanges assign it to one of three standard cycles so that expirations for listed options are distributed across the calendar. An option “class” refers to all option contracts (all strikes) of the same type (calls or puts) on the same underlying security.
Why cycles exist
Cycles help exchanges and market participants manage and organize option expirations so that not all strikes expire in the same months. They also provide a mix of short- and longer-term expirations for hedging and trading needs.
The three standard cycles (how months map)
Each listed option is assigned to one of three cycles. For any given cycle, a trader will normally see:
– The two front months (the two nearest calendar months) plus
– The two remaining months that belong to that option’s cycle.
The traditional cycle-month assignments are:
– January cycle — options available in January, April, July, October (i.e., the first month of each quarter).
– February cycle — options available in February, May, August, November (middle month of each quarter).
– March cycle — options available in March, June, September, December (last month of each quarter).
Example: If an option is on the January cycle and today is February, the two front months would be February and March; the cycle’s remaining months would include April and July. So the listed expirations you would see are February, March, April, and July.
How an option cycle works (practical mechanics)
– At listing: Exchanges assign a new option class to a cycle (originally by random distribution) so that listed expirations are spread across months.
– Always present: Regardless of the current date, a class will always have the two nearest months available plus its two cycle months. As time moves forward and the front month expires, the next month becomes a “front” month and the cycle’s two remaining months continue to track the original assignment.
– Expiration timing: Most equity option contracts expire at 4:00 PM Eastern Time on the third Friday of the expiration month (confirm contract specs—exceptions exist).
– Weekly options and LEAPS: Weekly options (short-term expirations published for many underlyings) and LEAPS (long-dated options that typically expire each January) change how traders can access expiration dates beyond the classic monthly cycle.
Option cycle assignments and listing rules
– Assignment at listing: The exchange allocates the new option class to a cycle so that the distribution of expirations across months is relatively even.
– Regulatory role: Exchanges and clearing organizations (e.g., the Options Clearing Corporation) regulate listing standards and contract specifications. Always consult the exchange’s or OCC’s contract specs for authoritative details.
Special considerations for traders and investors
– Weekly options: Many liquid stocks and ETFs have weekly expirations, reducing the importance of the traditional monthly cycle for short-duration strategies. Weeklies let you pick nearly any short-dated expiration independent of cycle months.
– LEAPS: Long-Term Equity Anticipation Securities are long-dated options that commonly expire in January each year; they function like regular options except for the longer tenor.
– Liquidity: Highly liquid underlyings (large-cap stocks, major ETFs, broad indexes) often have option series available every month and multiple strikes, whereas thinly traded issues may only have the standard cycle months and few strikes—wider spreads and poor fill quality are possible in illiquid series.
– Exercise and assignment risk: Most equity options are American-style (can be exercised any time before expiration), so early assignment is possible—important for deep-in-the-money calls and dividend-related situations. Index options may follow different settlement conventions (e.g., European-style or cash-settled), so confirm specifics.
– Expiration rules vary: While many options follow the “third-Friday-at-4:00 PM ET” convention, specific products (certain index options, monthly vs. weekly contracts) can have different cutoffs and settlement procedures—always confirm with the exchange/OCC.
Less common expiration cycles and special series
– Monthly-on-every-month: Some very liquid underlyings have contracts for all months (monthly) and numerous weekly expirations.
– Quarterly-only or LEAPS-only behaviors: Some series may be most active only in quarterly months or in annual LEAPS (January expirations).
– Exchange/issuer discretion: Exchanges can and do create additional expirations or pilot programs for new expiration schedules; check exchange notices for changes.
Practical steps: how to use option cycles when trading or hedging
1. Identify the option class and open the option chain.
– Look at the listed expiration months and the third/fourth months visible to infer the underlying’s cycle.
2. Determine your required time horizon.
– For short-term trades, consider weeklies (if available). For multi-month hedges, select the appropriate cycle month or LEAPS.
3. Check liquidity and spreads.
– Prefer strikes and expirations with good open interest and tight bid-ask spreads to reduce execution and slippage costs.
4. Confirm exact expiration and settlement rules.
– Verify expiration time, settlement type (physical vs. cash), and whether the option is American- or European-style. These affect assignment risk and settlement mechanics.
5. If rolling, match cycles consciously.
– Rolling a quarterly month into a weekly or another monthly expiration is a common way to extend/shorten exposure. Be aware that pronunciation of “cycle” matters less when weeklies are available, but watch liquidity and pricing.
6. Manage assignment risk.
– For American-style calls that are deep in-the-money approaching an ex-dividend date, consider the risk of early assignment. Puts also carry assignment risk for option sellers.
7. Use LEAPS for long-term exposure.
– If you need multi-year protection or leverage, consider LEAPS which typically expire in January and behave like standard options with a much longer time value.
8. Re-check before executing.
– Exchanges add expirations and change specs occasionally. Confirm the contract specs at your broker or on the exchange/OCC website right before trading.
Quick reference examples
– Example A (cycle identification): On an option chain you see available expirations Feb, Mar, Apr, Jul. The option is on the January cycle.
– Example B (after month passes): If June is current and a series is assigned to the January cycle, you will see June, July, October, January (two front months plus the cycle’s remaining two months).
– Example C (practical trading): You want a 3-week hedge on a stock that has weekly options. Instead of relying on the monthly cycle, pick the weekly that matches your 3-week horizon for a closer duration match and likely lower cost.
Where to find authoritative details
– Exchange contract specifications (e.g., CBOE, Nasdaq) and the Options Clearing Corporation (OCC) publish exact listing, expiration, settlement, and exercise rules for each option product—consult them for contract-specific details before trading.
– General educational overviews of option cycles are available from financial education sites (for example, Investopedia’s explanation of option cycles).
Summary
Option cycles are a standardized way exchanges distribute monthly expirations among listed option classes. Knowing a security’s cycle helps you understand which monthly expirations will always be available (the two front months plus the two months assigned by the cycle), but weekly options and LEAPS give traders additional flexibility. Always verify the specific contract’s expiration, settlement rules, and liquidity before placing trades.
Source
– Investopedia — “Option Cycle.” https://www.investopedia.com/terms/o/optioncycle.asp (consult for the foundational explanation of cycles and examples)
– For contract specifics and notices, consult exchange pages (CBOE, Nasdaq) and the Options Clearing Corporation (OCC).