What Is an Expiration Cycle?

With investing, an expiration cycle has to do with the set schedule in which various types of stock options will expire. In most cases, a cycle of this type will occur on a consistent basis, such as every three months, but may also occur on a monthly basis. Many forms of options are structured so that the expiration cycle is identified in the terms and conditions that govern the sale of the investment, making it easier for investors to manage those acquired holdings with greater efficiency.

While there are exceptions, the structure of an expiration cycle normally revolves around divisions within a calendar year, with the year divided into four equal sections or groups of three months each. From there, the cycle will identify a particular month within each section as the expiration date. For example, the cycle of a given equity option may be based on expiration dates occurring during January, April, July, and October, or the first months in each quarter of the year. Another option may have an expiration cycle that involves the last month of each quarter, including expiration dates found in March, June, September, and December.

Not all types of stock options will include this type of expiration cycle. Long-term equity anticipation securities are designed to involve a commitment longer than a single calendar year, and usually will not have provisions for this type of cycle. It is also possible for the option series to include expiration dates on a month to month basis, which means that the investor has the ability to exercise a contract on that stock option every month, if the investor decides the strike price is adequate.

Identifying the expiration cycle associated with a given option is very important for the investor. Doing so can make it easier to interpret market movements between each contract expiry and decide what to do in order to maximize the benefit associated with that option. For example, if the cycle uses a first month approach, the investor may choose to hold the asset through the January and April periods but then exercise the strike price in time for the July period, if that will result in a higher rate of return. As with most types of investment strategies, using the cycle to best advantage requires understanding what is happening in the marketplace and how those events are likely to influence the value of the options, and then take action accordingly.