What is Option Cycle?
306 reads · Last updated: December 5, 2024
Option cycle refers to the expiration dates that apply to the different classes of options. A newly listed option is assigned a cycle randomly to broadly distribute options across varying time frames. It is also known as an expiration cycle.With a few exceptions that have contracts 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.
Definition
An option cycle refers to the expiration dates applicable to different categories of options. It determines when an option contract will expire, typically divided into three main cycles. Knowing the option cycle helps investors predict the expiration time of options.
Origin
The concept of option cycles originated with the development of the options market. To better manage and allocate the expiration dates of option contracts, the market introduced a cyclical expiration mechanism. This mechanism aids investors in trading options across different time frames.
Categories and Features
Option cycles are generally divided into three main categories: January, February, and March cycles. Each cycle includes expiration dates in different months. For example, a January cycle might include expiration dates in January, April, July, and October. This classification allows the market to evenly distribute the expiration dates of option contracts throughout the year.
Case Studies
For instance, Apple Inc. options might be assigned to the January cycle, meaning their option contracts expire in January, April, July, and October. Another example is Tesla Inc., whose options might belong to the February cycle, indicating their contracts expire in February, May, August, and November. This allocation helps investors make strategic investments at different times.
Common Issues
Investors often confuse option cycles with the overall validity of an option. In reality, the option cycle only refers to the expiration months of the contract, not its overall validity. Understanding this can help investors better plan their investment strategies.
