What happens to index options at expiration

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Cycle option DEFINITION of the option cycle The expiry dates that apply to the various option series. An option cycle is the pattern of months in which options contracts expire. The cycles apply to stock and index options as well as to commodity, currency and debt instruments. There are three common options cycles: JAJO - January, April, July and October FMAN - February, May, August and November MJSD - March, June, September and December Note that the options on the January cycle have contracts in the first month each Quarter (January, April, July and October). The options assigned to the February cycle use the middle month of each quarter (February, May, August, and November). And March cycle options have options available during the last month of each quarter (March, June, September and December). BREAKING DOWN option cycle In addition to the January, February and March option cycles, individual equity and index options typically also expire in the current month (now) and in the following month (next month). This gives investors the opportunity to trade or hedge on short notice. For example, suppose that options for stocks ABC trading are accepted in the March cycle. If it is June now, it would list June and July contracts (the current and subsequent months), as well as September and December contracts. Since stock and index options have contracts for the current and the next month, one cannot tell the cycle with a view to the first two months, but rather it is necessary to look at the third and fourth months to see whether it will be in January, February or March cycle. Stock Option Expiry Cycles The decision to trade a stock option requires selecting a valid month. Since option strategies require changes over the life of a trade, you need to know in which months the options will expire. The expiration month you choose will have a significant impact on the potential success of an options trade. Hence, it is important to understand how the exchanges decide which expiration months are available for each stock. At any given time, there are at least four different expiration months for each stock on which options are traded. The reason for this is that when stock options first began in 1973, the Chicago Board Options Exchange (CBOE) decided that there would only be four months in which options could be traded at any one time. Later, when long-term securities (LEAPS) were introduced, options could be traded for more than four months. (For background reading on options, see the Options Basics tutorial.) Not All Stocks Trade the Same Options You may have noticed that not all stocks have the same expiration months. Look at the September 2008 expiration months for three different stocks: Microsoft (Nasdaq: MSFT), CitiGroup (NYSE: C), and Progressive (NYSE: PGR). Microsoft: September 2008, Oct 2008, Jan 2009, April 2009, Jan 2010 and Jan 2011. Progressive: Sept 2008, Oct 2008, Nov 2008 and Feb 2009. CitiGroup: Sept 2008, Oct 2008, Dec 2008, Jan 2009, Mar 2009 , Jan 2010 and Jan 2011. The first thing you might notice is that all three have September and October options. Next, Microsoft and CitiGroup have options available in January 2009, January 2010, and January 2011, while Progressive doesn't. But then it gets confusing. For the third month off, not one of the months agrees with those for either of the other two. And CitiGroup has an additional monthly trade: March 2009. Exactly how do the exchanges decide which expiry months should be available for each stock. To answer this question, you need to understand the history of how the exchange managed the discontinuation cycles option. When the stock options began, each share was assigned one of three cycles: January, February or March. There's no telling what cycle a stock was assigned to - it was purely random. Holdings assigned to the January cycle had options only in the first month of each quarter: January, April, July, and October. The stocks assigned to the February cycle only had the middle months of each quarter: February, May, August, and November. The March cycle stocks had the ending months of each quarter: March, June, September, and December. The Modified Expiration Cycles As options gained in popularity, it quickly became apparent that both the ground trader and individual investors preferred to trade or hedge for shorter terms. So the original rules were changed and in 1990 the CBOE decided that each stock would always have the current month and the following month available for trading. Because of this, all three stocks in the example above have September and October options. Each stock is valid for at least four months of trading. Under the new rules, the first two months are always the next two months, but the rules use the original cycles for the next two months. It can help to look at an example. Let's say it's the beginning of January and we're looking at a stock for the January cycle. According to the newer rules, the current month plus the following month is always available, so January and February are available. Because there are four months to trade, the next two months from the original cycle would be April and July. So the stock will have options available in January, February, April and July. What if January expires February is already trading, so that just becomes the almost-month contract. Since options must be traded for the first two months, March will begin trading on the first trading day after the January expiration date. So the four months are now available February, March, April and July. Now comes the tricky part: After the February options expire, March becomes the current contract. The following month, April, is already trading. But with March, April and July contracts trading, that's only three expiration months and we need four. So let's go back to the original cycle and add October because it's the next month in the January cycle after July. The options March, April, July and October are now available. The same argument determines which months stocks trade in February and March cycles. Adding LEAPS When an inventory has LEAPS available, there are more than four expiration months available. LEAPS only have the most popular stocks available. That's why, in our example above, Microsoft and CitiGroup had them, while Progressive didn't. (For background reading on LEAPS, see Using Options Instead of Equity Using LEAPS With Collars and Using LEAPS In A Covered Call Write.) Once you understand the basic option cycle, adding LEAPS isn't difficult. LEAPS are long-term options that, with a few exceptions, are no more than three years out and usually trade with a January expiration date. If a stock has LEAPS, new LEAPS will be issued in May, June or July, depending on the cycle to which the stock is assigned. When it comes time to add January in the normal rotation (without the current or short term contract), the January LEAPS hit becomes a normal option, which means the root symbol changes and a new LEAPS year is added. Let's go back and check out our original examples and go over what happened to Microsoft and CitiGroup. For Microsoft, we're going back in May 2008. The months for Microsoft were May 2008, June 2008, July 2008, October 2008, January 2009 and January 2010. After the May options had expired, a month had to be added. The previous two months, June and July, were already trading, as was the next month in the cycle: October. So, according to the rules for the January cycle, we would have to add the January expiration month. No further action would be required for a stock that did not have LEAPS and they would trade the four months of June, July, October and January 2009. But Microsoft already had LEAPS trading, which expired in January 2009. Converted to standard options (with an accompanying symbol change), and in January 2011 LEAPS were added. Nothing extraordinary happens to CitiGroup when the May options expire as it is on the March cycle. June was already trading, so only the month of July had to be added. After the May Expiration, CitiGroup now traded the months of June, July, September, and December, plus LEAPS in January 2009 and 2010. But let's through what happens after the June expiration. For the regular options, July, September and December were already trading, so all they had to do was the second front month: August. But for March cycle stocks like CitiGroup the January 2009 LEAPS converted to standard options after the June expiration date and the January 2011 LEAPS were introduced at the same time. In the months of July, August, September, December and January 2009, the CitiGroup had traded options in July and August, as well as in January and January 2011, on the Monday after the expiry of the June options LEAPS to be added. How Can You Tell What Cycle A Stock Is On You cannot tell what cycle a stock is by by putting on the front two months: all stocks have those months available. To find out the cycle, you need to look further at the third and fourth months. They can usually be available from the third month's expiration date. Keep adding three months to the third month until you reach January, February, or March. CitiGroup has its third month of contract in December. So if we add three months we get to March. We therefore know that the CitiGroup is in March. That said, you have to be careful when the third month happens to be January. While that may actually mean the stock is on the January cycle, any stock with LEAPS will also have January options trading. In that case, you need to look further to see what the fourth month is to confirm what cycle the stock is. In the example above, Microsoft has April available so we know for sure that it is on the January cycle. Conclusion Option-expiration cycles for stocks can be a little confusing, but if you take a little time to understand them, they become second nature. Since you may have to make adjustments during the life of a trade, it can be very important to know what expiry months will be available in the future. Understanding the phase-out cycles is just another way to help you increase your success rate when trading options. Equity options shares of eligible shares, subject to the eligibility criteria set by the Canadian Derivatives Clearing Corporation (CDCC). Eligibility criteria The underlying issues must meet strict eligibility requirements, including sufficient liquidity and market capitalization. Trading unit One contract equals 100 shares (can be adjusted for stock splits, distributions, etc.). Expiration Cycle At least the next two expiration days and the next two quarterly expiration times, as defined in the expiration cycle. Annual expiry in January for long-term options. Minimum fluctuation in the option premium Options under C0.10 C0.01 Options at a price of C0.10 or more C0.05 The premium per contract is determined by multiplying the quote by 100 (e.g. quote C2.75 times 100 C275) . For more information on penny trading, see circular 093-16. Exercise prices At least five basis points, which make up the current market price. Contract type Last trading day The third Friday of the contract month if it is a business day. If it is not a business day, the first preceding business day. Expiry Date The last trading day of the contract month. Position reporting threshold 250 options contracts. Position limit Information on position limits can be obtained from the exchange as it is subject to periodic changes. See circular. Price Limit A trading stall is called in connection with the tripping of circuit breakers on the underlying problems. Via the Canadian Derivatives Clearing Corporation (CDCC). Via CDS Clearing and Depository Services Inc. on the third business day after the exercise day. Trading hours 9:30 a.m. to 4:00 a.m. The regular session opens at 9:30 a.m. Each option class will then be opened for trading when there is a trade in the underlying issue on a recognized Canadian exchange. If such trading has not yet occurred, the option class will open for trading at 9:35 am Clearing Corporation Canadian Derivatives Clearing Corporation (CDCC). Trading Processes The information contained in this document is provided for informational purposes only and is not legally binding. This document is a summary of the product specifications contained in the Rules of the Bourse, Inc. Bourse de Montral Inc. makes every effort to keep this document updated, but does not guarantee that it is complete or accurate. In the event of discrepancies between the information contained in this document and the rules of the exchange, it will decide. The rules of the exchange must be consulted in all cases involving product specifications.