When buying or selling options, it’s important to know the option expiration date and the option expiration cycle. Selecting the option expiration month is an important part of any option strategy because it can affect your trade’s success or failure.
Equity Option Expiration Date
The option expiration date is the day the option is no longer valid and ceases to exist. It's the deadline for deciding whether to exercise the option or let it expire worthless.
You can check the option expiration date by looking at the options trading symbol. For example, you might be looking to trade an Apple call option with the symbol AAPL101016C00290000.The 6 numbers following the root symbol – 101016 -- is the expiration date.
The first two numbers indicate the year of expiration, so we know this option expires in 2010.
The next four numbers are the expiration month and day. So the expiration date for our Apple option is in the 10th month (October) on the 16th day.
Before we go further, we need to quickly address a common misconception about expiration dates. Many people believe options expire on the third Friday of the month, but this is technically incorrect. Most stock options expire on the third Saturday of the month, but they stop trading the day before.
Just to make things slightly more complicated, if the third Friday is a market holiday, the expiration date moves up to the third Friday and the third Thursday becomes the last trading day. And also note that some index options expire on a different day than stock options, so if you're trading index options, double-check the expiration date.
Option Expiration Cycle
When the Chicago Board Options Exchange (CBOE) trade options, they decided only four months would be available at any given time. They randomly assigned each stock to one of three cycles beginning in January, February or March.
The January cycle stocks had options available that expired in the first month of each quarter: January, April, July and October. Stocks in the February had options expiring in the middle months of each quarter: February, May, August and November. And the March cycle stock options expired in the last month of each quarter: March, June, September and December.
As the popularity of stock options grew, the CBOE modified the rules to allow every stock to have options that would expire in the current month, the following month and two farther out months (depending on its cycle). Each stock would continue to have four months of options trading at one time.
The convention is best illustrated with an example. Let's say today is January 5th and we're looking to trade options of a stock assigned to the January cycle. Options trade for January (current month) and February (next month). Since this stock is in the January cycle, April and July are the other two months for which this option trades.
The January option stops trading at the end of business on the third Friday in January. It expires the third Saturday in January. On the Monday following expiration, the March option begins to trade, because now February is the 'current month' and March is the 'next month.' Now there are options available for February, March, April and July.
Once the February option expires, the March option becomes the current month and April, which was already trading, becomes the next month contract. But now there are only three months trading -- March, April and July -- and the CBOE rules require four months. We go back to check our January cycle months and see the next available month in our cycle is October. We're now back to four months of options trading -- March, April, July and October.
Some stocks have Long-term Equity AnticiPation Securities or LEAPS option contracts that allow investors to take options positions with longer expiration dates. These options trade with January expiration dates each year up to three years in the future. For stocks with LEAPS, a new January LEAP is added in May, June or July depending on the option cycle the stock belongs to.
While option expiration cycles are confusing, most broker systems make it easy to look up the available expiration months for any stock. However, if you use options extensively in your trading, it can be important to know the available expiration months, since they will affect your strategy.