Options on a single underlying stock have expiration dates that are always the same. Every stock with listed options has a cycle that doesn't change. This cycle is how you can tell which stock it is. There are three cycles every year:
- Jan., Apr., Jul., and Oct. (JAJO).
- March, September, December, and June (MJSD).
- The months of February, May, August, and November (FMAN).
In addition to these set expiration dates, there are also active options that will expire in the next month. For example, let's say that the options on a certain stock run out in April, which is the cycle month. You might be able to trade short-term options that end in March in February (even though that is not a part of the normal cyclical expiration).
Tip: Some traders in options use short-term options as a way to gamble. They come and go more quickly than cyclical options, so people often miss them as chances. For instance, they can be used to protect longer-term short option positions for a short time.
When an option ends is on the third Saturday of the month in which it ends. An order to close an open position must be placed and carried out before the option's expiration time on the last trading day before expiration day. As a general rule, this means that the trade has to be made before the end of business on the Friday before the Saturday of expiration. However, a specific cut off time could be missed on a very busy Friday, so you need to make sure that your broker will be able to make your trade in time to follow the rules.
Your last-minute order can be one of three different kinds of deals. It can be an order to buy to close a short position that has already been sold, an order to sell to close a long position that has already been opened, or an exercise order to buy or sell 100 shares of stock for each option involved. If a last-minute exercise is made against your short position, the order is placed without your knowledge. You are notified of the exercise and told to deliver funds (for an exercised call) or accept and pay for shares (for an exercised put).
Example: The Right Time: You bought a call that was set to expire in July. On the third Saturday of that month, it will run out. You need to place a sell order or an order to exercise the call (to buy 100 shares of stock at the strike price) before expiration time on the Friday before expiration, which is the last trading day before expiration. If you don't put in a sell order or exercise the option by that time, it will be worthless and you won't get anything out of it.
With the deadline coming up and the unknown possibility of a busy Friday on the market, which can happen whether you place orders over the phone or on the Internet, you need to place that order with enough time for it to be executed. You can put in the order a long time in advance and tell them to get it done by Friday's end of business. If the brokerage firm accepts your order, you will be protected if they don't carry it out as long as you put it in well before the deadline.
How to Start and End Option Trades
Every option trade you make must include four terms: the strike price, the expiration month, whether the option is a call or a put, and the stock that it is based on. If any of these terms change, it means that a whole new option is being considered.
When you buy or sell an option, you open it. This is called having a "open position." It's called an opening purchase transaction when you buy something. And if you start by selling an option, that is called a "opening sale transaction."
Example: You bought a call contract two months ago. When you put in your order, you were making a first-time purchase. As long as you don't do anything else, that status will stay the same. When you enter a closing sale transaction to sell the call, the position will be closed. You can also use the option. If you don't do either of these things, the option will expire.
Example: The Danger of Working Out: Last month, you sold an option, which put you in a short position. As long as you don't do anything else, the position will stay open. You can wait until the option expires, or you can make a closing purchase and cancel the option before the option expires. As long as the short position is still open, the call could be exercised and 100 shares could be called away at the strike price. Exercise will only happen if the market price of the stock goes up above the strike price of the call.
