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Old 01-04-2012, 02:22 PM   #1

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Options Expiration

Investors consider options dying assets because their value slowly decreases starting from the moment they enter the market. Every option expires, and all options must be bought, sold, or exercised on or before its expiration date (strike date). When an option expires, its value becomes worthless. Companies are not obligated to offer options every month. Expirations run in cycles, and it's important for traders to understand how they work before buying and selling options.

Lifespan of an Option
An option enters a chain once an exchange assigns it a cycle. Starting from the beginning of the cycle, traders can buy, sell or exercise the option at anytime before its strike date. The ask bid spread determines whether an option will trade easily. Options running closer to their expiation date move faster than those farther away.

Call option chain:
GEA20 (strike date 1/15),
GEB20 (strike date 2/15),
GEC20 (strike date 3/15),

Result: On 1/10, option GEA20 will trade faster (more liquid) than GEB20. Option GEC20 will hardly move at all. Traders wanting to enter the market fast will need to choose from listings in GE's, "A" cycle

Option Expiration Cycles
Options always run in four-month cycles. In the past, companies could only offer stocks in the current quarter. Due to the demand for short-term hedging, exchanges introduced long-term equity anticipation securities (LEAPS) into the market, which allowed companies to list options year-round. Only popular and liquid stocks offer investors LEAPS options.

Options traded in more than one expiration cycle (LEAPS) must follow the four-month cycle rule. Exchanges assign stocks an option cycle depending on the month that the company offers their first option.

January cycles (JAJO) = Expirations in Jan, Apr, Jul and Oct.
February cycles (FMAN) = Expirations in Feb, May, Aug and Nov.
March cycles (MJSD) = Expirations in Mar, Jun, Sept and Dec.

On December 5, GE decides to offer options starting in January. Their exchange will automatically assign a JAJO option cycle to the option chain.

Expiration Codes: A=Jan, B=Feb, C=Mar, D=Apr, G=Jul, J=Oct

If GE does not offer options every month the chain will look like:
GEA20, GED20, GEG20, GEJ20, running on a JAJO cycle

If GE offers options every month the chain will look like:
GEA20, GEB20, GEC20, GED20, running on a JAJO cycle

Cycle Chains vs. Consecutive Month Chains
Companies are not obligated to offer stock options every month. However, if a company offers options, the first two listing in their cycle must be the current month and month that follows. The remaining two listings will depend on the expiration cycle assigned by the exchange.

On January 5, the following options are available:
1) GE Option Chain: GEA20, GEB20, GEC20, GED20

2) Ford Option Chain: FordA20, FordB20, FordD20, FordG20

Expiration Codes: A=Jan, B=Feb, C=Mar, D=Apr, G=Jul

Result: GE offers options every month, Jan-April. Ford offers options in Jan and Feb, but they don't offer them again until April or July. The exchange obligates Ford to offer options in January and February because the current date is 1/5. Ford's option cycle is JAJO, which forces the company to list their last two options to expire in April and July, which completes the cycle.

Finding the Expiration Cycle
The first two months in an expiration cycle do not identify the cycle. Investors must look at the third month in an expiration cycle (JAJO, FMAN or MJSD) to find which cycle the option is trading on. If the third month is January, the fourth month in the cycle will be the option's expiration cycle.


Expiration Codes: A=Jan, B=Feb, C=Mar, D=Apr, K=Nov, L=Dec

1) GE Option Chain: GEA20, GEB20, GEC20, GED20
In this example, GEC20 (March expiration) is the third option in the chain. This expiration cycle is a March cycle or MJSD cycle,

2) Ford Option Chain: FordK20, FordL20, FordA20, FordB20

In this example, FordA20 (January expiration) is the third option in the chain. Because LEAPS end in January, to find the chain's expiration cycle, an investor needs to look at the fourth option in the chain (FordB20). The expiration cycle in this example is a February cycle or FMAN cycle.

NEXT: Exercise & Assignment
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