Covered Call Writing And Stock Option Expiration Cycles

Includes: JBHT
by: Alan Ellman

When performing our covered call writing calculations we must view an options chain. When we look at the different expiration months available for our stock options, we note that different stocks have different expiration months. How can that be? We want uniformity, not chaos. Like most things, there is a reasonable explanation.

All options are defined by an expiration month and date (the third Friday of the month, except for some quarterly and weekly expirations of some securities) after which the contract becomes invalid and the right to exercise no longer exists. When options began trading in 1973, the CBOE (Chicago Board Options Exchange) decided that there would be only four months at a time when options could be traded. Stocks were then randomly assigned to one of three cycles:

  • January cycle- options available in the first month of each quarter (Jan., April, July and Oct.)
  • February cycle- options available in the middle month of each quarter (Feb., May, Aug., and Nov.)
  • March cycle- options available in the last month of each quarter (March, June, Sept., and Dec.)

The foregoing cycles proved to be a workable concept until options gained in popularity, increasing the demand for shorter-term options. In 1990, the CBOE decided that each stock (with options) would have the current and following months to trade, PLUS the next two months from the original cycle (hope your head isn't starting to spin). Let's simplify things by looking at the chart below:

Current (Front) Month Next Month Third Option Fourth Option
January Cycle
January February April (1st month) July (1st month)
February Cycle
January February May (2nd month) August (2nd month)
March Cycle
January February June (3rd month) September (3rd month)
Click to enlarge

Expiration Cycles

If the current month is January, we see that all options are available for both the current (January) and next month (February). The last two option expiration months available will depend on their original placement in one of the three cycles:

  • January cycle will also have April and July expirations
  • February cycle will also have May and August expirations
  • March cycle will also have June and September expirations

Now, if your head has stopped spinning and you're feeling a bit better, I ask you NOT to put away the Tylenol, at least not yet! Here come the LEAPS (Long-term Equity Anticipation Securities), which are options with longer-term expirations. Only heavily traded securities such as Microsoft have these types of derivatives. LEAPS will have options with more than four months of expirations, with some having up to seven months. LEAPS can further complicate these cycles, however, those of you who follow the BCI system of selling predominantly one-month call options need not be concerned with these extended expiration periods. Take note that the vast majority of stock options will fall into the four month cycle depicted in the chart above. To determine which cycle an equity is assigned to you must look at the third and fourth expirations out as all securities will have the current and next month options available.

Here is a real life example as of July, 2012: J.B. Hunt Transport Services, Inc. (NASDAQ: JBHT):

Click to enlarge

JBHT is a stock currently on the Blue collar Investor Premium Watch List for covered call candidates. We note the available expirations months are:

  • July
  • August
  • November
  • February

July and August represent the current and next month expirations. November and February represent the next two available expiration months in the February cycle.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.