What it means
Standard listed options expire on a fixed rhythm instead of any date a trader likes. The three traditional cycles are the January cycle, which uses January, April, July and October, the February cycle, with February, May, August and November, and the March cycle, with March, June, September and December.
Each underlying share is assigned to one of them. Alongside the cycle months, exchanges normally list the nearest one or two months, so there are always short-dated contracts to trade.
The result is a mix of near-term months and further-out months drawn from the cycle. The exact listing practice is set by each exchange and has evolved over time.
The cycle matters because it affects what hedging and speculation are possible. A company wanting protection through a particular date may find that the nearest listed expiry falls before or after the date it needs.
The treasurer then has to choose the closest option or look at a tailored contract arranged with a bank. Modern markets have added weekly and daily expiries for popular securities and indices, which reduces the importance of the traditional cycle for active traders.
For ordinary shares, however, the monthly cycle remains the framework. Anyone using listed options should always check the actual list of expiries for the security concerned.
The cycle also influences cost. A contract that expires soon after the event being hedged has less time value to pay for, so it is cheaper than one that runs for months beyond it.
Time value is the part of an option's price that reflects the time remaining, and it fades as expiry approaches. Understanding the cycle also helps in planning rollovers.
When an option nears expiry, a trader or treasury team often closes it and opens a new one with a later expiry. Knowing which months are available lets them plan the roll in advance and budget for the extra premium.
In practice
Real-world examples.
Example
A company holds put options on a supplier's shares as protection. The options expire in April, which belongs to its January cycle, and the treasurer plans to roll them into July before they expire. She diarises the roll date a few weeks ahead so the new contract can be bought at a sensible price.
Example
An investor wants an option that expires after a company's annual results in late February. The share is on a February cycle, so a February contract is available and she buys it. The expiry falls just after the announcement, which keeps the cost of the protection down.
Example
A fund manager finds that the shares she trades have only monthly expiries, with none for the exact week she needs. She chooses the nearest listed month and accepts that the contract will include some extra time value she does not need. She records the extra premium as a known cost of the hedge in her notes to the investment committee.
Case study
Seen in the real world.
Larkspur Energy is a fictional utility that wanted to protect a stake in a listed fuel supplier through a planned board decision in early August. The treasurer checked the supplier's option expiries and found the shares were on the February cycle.
The available months were therefore August and November, along with the nearest short-dated months. The August contract fell neatly after the board decision, so she bought puts for that month and avoided paying for protection beyond the date she needed. The board noted that careful reading of the expiry list had saved real money.
In this illustrative story she saved money by choosing the cycle month that matched the event. If the shares had been on the January cycle, she would have needed July, which expires before the decision, or October, which pays for extra months of cover. The treasurer added a line to the hedging policy requiring the expiry list to be checked before any option is chosen.
Watch out
Common mistakes.
- Assuming every share has options expiring in every month, when the cycle determines which months are listed.
- Choosing an expiry that falls before the event being hedged, so the protection ends too soon.
- Overpaying for a distant expiry when a nearer one would cover the risk at lower cost, because the extra months add time value that has to be paid for upfront.
Questions
People also ask.
How do I know which cycle a share is on?
The exchange's option listings and your broker's option chain show the available expiry months for each security.
Are weekly options part of the cycle?
Not in the traditional sense, since weeklies are additional short-dated expiries listed alongside the monthly cycle for selected securities.
Can a share change its cycle?
Exchanges can change listings over time, so it is sensible to check the current list rather than rely on memory. Your broker's option chain always shows the months that are actually available today.
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