Option Cycle

  

Categories: Derivatives

To everything, there is a season. In spring, baby rabbits are born. In fall, you cut up all that good rabbit meat for your mom's stew recipe. In winter, you look forward to next year's rabbit stew. Turn, turn, turn.

The option cycle follows this structure to a certain degree. Specifically, an options cycle represents all the expiration dates related to particular option classes.

They relate to a company's quarterly cycle. Firms release earnings in three-month intervals (corresponding to various fiscal quarters). When a new company gets its first option listing, it gets put on a particular quarterly option cycle (picking from one of three choices, January/April/July/October, February/May/August/November, or March/June/September/December).

Related or Semi-related Video

Finance: What are stock options in 90 se...0 Views

00:00

Finance allah shmoop what are stock options in ninety seconds

00:05

or less Here's a stock ibm not the tech company

00:11

This one makes an anti constipation drug It's trading at

00:14

one hundred eighty bucks a share Okay so here's an

00:16

option of buy a share of ibm anytime in roughly

00:19

the next three months For one hundred ninety dollars a

00:21

share it's called a call option If you really believe

00:24

the ibm will go to say two hundred dollars a

00:26

share in the next three months well you'd be what's

00:28

called ten dollars in the money then or then have

00:31

a stock option or call option with a strike price

00:34

of one hundred ninety dollars which would then have intrinsic

00:37

value of ten bucks a share On the other end

00:39

of the buy sell desk is the gal willing to

00:42

sell you that call option for three bucks Three bucks

00:45

a premium So gut check time Would you pay three

00:49

dollars for the right to buy a share if ibm

00:52

for ten dollars higher than where the stock's trading now

00:55

today Meaning that to break even in the next three

00:58

months the stock has to trade all the way up

01:00

from one hundred eighty dollars a share to one hundred

01:02

ninety three dollars a share jobs for you to get

01:04

your money back but it goes to two hundred two

01:06

share Well if you sell that option you'll have invested

01:09

three bucks a share for a net return of seven

01:11

bucks in just three months or less And yes we're

01:14

ignoring commissions and taxes here because well in problems like

01:17

this or just a in the book but three dollars

01:19

into seven only three months Yeah that's a great score

01:21

You'd have more than doubled your money And on an

01:24

annualized return basis that's over a nine hundred percent dish

01:27

return really good score but with a much more likely

01:30

case that you spend three bucks to buy the option

01:32

and it expires totally worthless And then you've lost your

01:35

entire investment in that option So that's a call option

01:38

It's evil twin is a put option So whereas a

01:41

call options the rightto by a security to set price

01:45

by a certain set date a put option is the

01:47

right to sell that option We'd go into more detail

01:49

here but we're promised ninety seconds

Up Next

Finance: What Is a Put Option?
83 Views

What is a put option? A put option is a type of contract that lets the investor sell shares of a stock at a certain price and within a window of ti...

Finance: What Is a Call Option?
25 Views

What is a call option? A call option is a type of contract that lets the investor buy shares of a stock at a certain price and within a window of t...

Finance: What is Intrinsic Value (of An Option and of an Asset)?
6 Views

The intrinsic value of an option is the share price of a stock minus its strike price - i.e. the "in the money" amount.

Find other enlightening terms in Shmoop Finance Genius Bar(f)