Everyone likes when things make sense. When we understand why things are the way they are it has a calming effect on us. When we look at the different expiration months available for our stock options, an explanation is required and demanded by the curious investor. On first glance it makes no sense at all! 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) |
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. However, intelligence does breed curiosity, so for those of you interested in learning more about LEAPS and potentially using these longer-term options as part of your covered call writing strategy, a more detailed discussion of same is included in my upcoming book, Alan Ellman’s Encyclopedia for Covered Call Writing. For purposes of this article, simply 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.
FOSL- Early warning technicals:
Up until July FOSL was one of the best-performing equities listed on our premium watch list. While the market has declined since that time, so has FOSL but to a greater extent. I wanted to show you a technical chart using the BCI system parameters which clearly shows early warning signs of an impending price decline:
FOSL- Technical warning of a price decline
Note the following:
- The price drops below the 20-d ema (red arrow) prior to the August 9th earnings report
- The price gaps down dramatically after the ER (thick red arrow)
- The MACD (blue arrow) and stochastic oscillator (green arrow) turn bearish at the end of July giving us an early warning signal of a price decline
- All bearish signals are confirmed with increasing volume (black line)
With all bearish technicals and a volatile market tone, appropriate exit strategies were indicated. This is a classic situation when preparation and education could avoid major losses. Needless to say, avoiding the earnings report (if you were still holding the stock) was critical to the BCI system.
Article about The Blue Collar Investor:
Shoestring Venture, a site that highlights business book authors, will be publishing an article about The Blue Collar Investor on September 19th. I will be providing a link to the article once it is published. I owe it to you and your support for the success of The Blue Collar Investor. Thank you!
Market tone:
The bad news was more negative news from economic reports. The good news was an appreciating stock market for the week:
- GDP increased by a weak 1% annualized for the 2nd quarter
- Core inflation rate rose by 2.1% from the 1st quarter
- New home sales dropped by 0.7% in July to a 5-month low. Experts believe that housing will remain anemic until the job market improves
- Orders for factory goods rose 4% in July mainly due to demand for cars
For the week, the S&P 500 rose by 4.7% for a year-to-date return of (-) 5.2% including dividends.
A 3-month chart of the S&P 500 vs. the VIX shows how challenging the past month has been for us. I constructed a chart which highlights the past month (green shaded area) versus the previous 2 months (yellow shaded area):
Market tone: 3-month chart as of 8-26-11
Note the following:
- In June and July the VIX was under control and the market traded sideways. In these conditions we can ladder our strikes using both in and out-of-the-money. Covered call writers can generate a nice cash flow even if the market remains flat.
- In August, the VIX went wild (future video: VIX gone wild?). The S&P 500 trended down and multi-100 point movements were the norm. Here we must either stay on the sidelines or take a defensive posture by selling only in-the-money strikes with low-beta stocks or ETFs. As I mentioned in the Premium Emergency Management Report other strategies could include protective puts, using inverse ETFs, rolling down and selling cash-secured puts.
- In normal market conditions covered call writing, when mastered, can be extremely rewarding. When the market is “out of control” it is challenging but shouldn’t discourage us because there are always strategies to overcome even the most trying of times even if it means taking a breather until conditions normalize.
Thank you:
Many thanks to our friends for expressing your concern and well-wishes to all our members on the east coast as we await for Hurricane Irene to pass through our backyard. Your thoughts and prayers are greatly appreciated.
Wishing you the best in investing,
To our premium members:
I wanted to update you on the upcoming premium stock report. As you know there is a devastating hurricane moving north on the east coast where the BCI team resides. There is a significant chance of a power outage and we are taking every step possible to maintain the quality of service you deserve:
• The information necessary to produce the premium report is available to us by 9PM EST.
• We have all our spreadsheets ready to go once we have the information
• We will work through the night tonight or as long as the power situation permits
• Mother Nature permitting, we will publish the report and notify you by direct email and blog posting as always
• The weekly blog article was published on Friday evening, a day or two early, in the event of a power loss. If and when the Premium Report is uploaded to your premium site, I would suggest printing it out as I am unsure if power will be lost to the servers supporting the site
• My team and I will keep you updated as to the progress of these reports and articles unless of course we are shut down by the storm
• Should we lose power, you will hear from us as soon as we are back online
My team and I appreciate the tremendous support you give us and will do everything possible to provide the quality of service you deserve.
Thanks for your understanding in this matter and please STAY SAFE.
Alan and the BCI team
Alan,
Is there a way to create a comparison chart like you have in this article from the free stockcharts site?
Thanks for another wonderful article.
Ellen
Good luck to all of us on the East Coast – fringe of the storm is near Central NJ – 12 Noon Saturday.
Sunny and in the 70s here in southern California. Thinking of all our friends on the east coast. Be safe.
Paul
I went to the gym early this morning to find it unusually empty for a Saturday morning. On the way home I passed a COSTCO to see a huge lineup of people waiting for the store to open. It seems that the folks were looking to buy batteries, flashlights, food, water and bibles. For those of us on the east coast, let’s find a safe place to hibernate and prepare for cleanup on Monday.
My best to all.
Alan
Ellen (#2),
Yes you can create a comparision chart at this site. From the homepage use the dropdown at the top of the page to select “Perf Chart”. Enter the ticker symbols of the securities you are looking to compare, separated by commas. That should do it.
Alan
Premium Members,
The Weekly Report has been uploaded to the Premium Member website.
Best,
Barry
Just curious who determines which stocks have options. Do the corporations have a say?
Thanks.
Fred
Fred,
The options exchanges decide which options to list; corporations have no say in the matter. They make their decisions based on a myriad of factors such as company assets, price of stock (over $7.50 for new listings), trading activity, daily trading volume, shares outstanding and others.
Alan
Are these option exchanges open for trading the same hours as the stock exchanges?
Rich
Anyone use a brokerage that allows margin accounts for IRAs?
Thanks.
Steve
Richard (#10),
Options exchanges trade during the same hours as the underlying stocks PLUS a few extra minutes (4:02 EST). The only exception is expiration Friday when trading stops exactly at 4PM EST.
Alan
Steve,
I’m fairly certain that margin accounts are prohibited for IRA accounts.
Good luck.
Amy
Alan,
Do you factor in volume and open interest when deciding on which options to use?
Steve
In your dvd program you discuss the difference between American and European options. I have not seen any European options associated with the stocks on your list. Are there any stocks with European options?
Thank you.
Pam
To our members:
Because our office is still without power due to the recent hurricane, we have been forced to use innovative measures to ship our books and DVDs. As a result, shipping labels and some product information will be hand written but complete in content. All educatuional products should arrive in a timely manner. I am also behind in responding to off-site emails and hope to catch up soon but that depends on our local power authority. Thanks for your understanding in this matter.
Alan
Steve (#14),
I look at open interest more than volume since the former is cumulative and the latter is a daily stat. As a guideline Im like to see at least 100 contracts of open interest and/or a bid-ask spread of $0.30 or less. I also only trade stocks that have an average daily trading volume of 250k shares/day or more. Here is a link to an article I published on this topic:
http://www.thebluecollarinvestor.com/blog/open-interest-and-volume-plus-non-standard-options/
Alan
Check this site out. It calculates yields etc. for Covered Calls! The only problem is it’s not live – so the numbers appear to be the opening numbers. Good for sorting and then use our calculator to update or correct in your head.
http://www.marketintelligencecenter.com/chains.aspx
Pam (#15),
All of our stock options are American style and can be exercised at any time prior to expiration. In general, index options are European in style and can be exercised on expiration Friday only.
Alan
Steve,
I am absolutely certain you cannot have a margin IRA account. You cannot use IRA assets as collateral for a loan.
Premium members:
This week’s abbreviated version of top-performing ETFs and analysis of ALL Select Sector Components has been uploaded to your premium site. Due to the hurricanne and subsequent loss of power (still not on!) the usual graphics could not be included.
For your convenience, here is the link to login to the premium site:
http://www.thebluecollarinvestor.com/member/login.php
Not a premium member? Check out this link:
http://www.thebluecollarinvestor.com/membership.shtml
Alan and the BCI team
Alan,
Can you explain why hibb is listed as inconclusive on your stock list Thanks.
John