Options FAQ: LEAPS® & Cycles

by The Options Industry Council | April 13, 2011 5:34 pm

LEAPS® & Cycles Questions

LEAPS® & Cycles Answers

Q: What are cycles? And how are they affected when LEAPS® are listed?

A: Options on a given stock are listed according to one of the following expiration cycles:

Q-1 Q-2 Q-3 Q-4
Cycle 1 January April July October
Cycle 2 February May August November
Cycle 3 March June September December

At any given time, there will normally be four different expiration months trading on a particular stock. All stocks will have options listed for the two upcoming expiration months along with two months from their expiration cycle. The table below illustrates the months listed for each cycle throughout the year, beginning on the first day of the year. The most recently listed months are boldfaced.

At start of calendar year…

Cycle 1 January February April July
Cycle 2 January February May August
Cycle 3 January February March June

…the above months are listed.

After January expires…

Cycle 1 February March April July
Cycle 2 February March May August
Cycle 3 February March June September

…September is added to Cycle 3.

After February expires…

Cycle 1 March April July October
Cycle 2 March April May August
Cycle 3 March April June September

…October is added to Cycle 1.

After March expires…

Cycle 1 April May July October
Cycle 2 April May August November
Cycle 3 April May June September

…November is added to Cycle 2.

After April expires…

Cycle 1 May June July October
Cycle 2 May June August November
Cycle 3 May June September December

…December is added to Cycle 3.

After May expires…

Cycle 1 June July October January
Cycle 2 June July August November
Cycle 3 June July September December

…January is added to Cycle 1.

After June expires…

Cycle 1 July August October January
Cycle 2 July August November February
Cycle 3 July August September December

…February is added to Cycle 2.

After July expires…

Cycle 1 August September October January
Cycle 2 August September November February
Cycle 3 August September December March

…March is added to Cycle 3.

After August expires…

Cycle 1 September October January April
Cycle 2 September October November February
Cycle 3 September October December March

…April is added to Cycle 1.

After September expires…

Cycle 1 October November January April
Cycle 2 October November February May
Cycle 3 October November December March

…May is added to Cycle 2.

After October expires…

Cycle 1 November December January April
Cycle 2 November December February May
Cycle 3 November December March June

…June is added to Cycle 3.

After November expires…

Cycle 1 December January April July
Cycle 2 December January February May
Cycle 3 December January March June

…July is added to Cycle 1.

After December expires…

Cycle 1 January February April July
Cycle 2 January February May August
Cycle 3 January February March June

…August is added to Cycle 2.

When determining the cycle to which a particular stock belongs, pull up a chain of its options match the 3rd and 4th expiration months with the relevant table above, and identify the cycle.

 

Q: Where can I find information on LEAPS® options and various strategies based on LEAPS®?

A: You can find delayed quotes for LEAPS® here on our site under Quotes. Once you have entered a symbol and selected “Detail Options Chains”, choose “LEAPS only” in the “Expiration” dropdown menu. Also in under the strategies section you will find a discussion of various strategies involving options. For a comprehensive list of stocks on which LEAPS® are traded you may want to look at our LEAPS® list (XLS).

 

Q: I recently attended a seminar where the instructor said that some brokers recognize LEAPS® securities as stocks and will allow writing of covered calls against LEAPS®, even in retirement accounts. I have searched since this time and have not found a broker that will allow this strategy in a retirement account. Do you have a suggestion?

A: Buying a long-term call and selling short-term calls against it, an example of a calendar spread, is a popular strategy. However, while the calls being written are hedged, they are not considered to be “covered.” In the event of assignment, because of the 1-day lag between exercise and assignment, using the long-term call to close out the position would require being short the stock for a day. And many brokerages do not allow short stock positions in retirement accounts under any circumstances. We can only suggest that you continue searching for a broker that allows this strategy.

 

Q: I own a number of LEAPS® options on a specific stock. From what I read in the press, the company is planning to spin off a significant portion of their corporation which obviously will reduce the price of their stock. Can you tell me how option contracts will be treated, if and when this spin off occurs? Will we be given LEAPS® for the new corporation or compensated in some other way for the reduced value of the options for what will amount to a smaller corporation with a lower stock price and consequently a lower value for its LEAPS®?

A: If an upcoming spin off has just been announced, the terms of a possible adjustment may not be immediately known. Although the exact adjustment may not be known, it is safe to assume that existing option contracts will be adjusted so that an option holders’ potential equity would not be diluted. There are 4 things you can do that are proactive in locating information regarding adjusted contracts due to splits, mergers and spin offs.

If the spin off information is not available at our website, it will be posted as soon as the OCC receives all of the relevant facts from the parties involved in the corporate action and after the vote of the Securities Committee. Generally, a definitive adjustment determination is announced as soon as practical after all pertinent facts become available.

Distributions of property other than the underlying security may require different adjustments. For example, outstanding options might be adjusted to include the distributed property.

EXAMPLE: If XYZ “spins off” its subsidiary ABC by distributing to its stockholders 1 shares of ABC stock for each 5 shares of XYZ stock, outstanding XYZ options might be adjusted to require delivery of 100 shares of XYZ stock plus 20 shares of ABC stock at the original strike price in question.

 

Q: When are the exchanges going to list 2014 LEAPS®?

A: Cycle 1:

Cycle 2:

Cycle 3:

 

Q: Where can I get a complete LEAPS® list?

A: You can access a complete LEAPS® list here:

 

Q: The exchanges used to list LEAPS earlier in the year. When did they change the procedures? And why do the exchanges list fewer LEAPS than in years past?

A: In September 2008, the U.S. options exchanges and The Options Clearing Corporation (OCC) received Securities and Exchange Commission approval to standardize many of the listing criteria found in the Options Listing Procedure Plan (OLPP). Due to listing of many one-point strikes (16, 17, 18, 19, etc.) as well as other products, such as Quarterly options, the options exchanges decided to list LEAPS only on products that have an average daily volume of at least 1000 contracts. The dates for next year’s LEAPS listing can be found here.

The relevant language related to this topic has been excerpted below and can be found on Page 8 of the OLPP (link to the OLPP can be found below):

(e) With regard to the listing of new January Long-term Equity AnticiPation (“LEAP”) series on equity option classes, options on Exchange Traded Funds (“ETF”), or options on Trust Issued Receipts (“TIR”), the Series Selecting Exchange and any other exchange that lists and trades the same option class shall not add new LEAP series on that option class:
(i) Earlier than September (which is 28 months before the expiration), for an option class on the January expiration cycle;
(ii) Earlier than October (which is 27 months before expiration), for an option class on the February expiration cycle; and
(iii) Earlier than November (which is 26 months before expiration), for an option class on the March expiration cycle.

Exchanges that list and trade the same equity option class, ETF option class, or TIR option class are authorized to jointly determine and coordinate with OCC on the date of introduction of new LEAP series for that option class consistent with the above paragraph.
(f) The Series Selecting Exchange shall not list new LEAP series on equity option classes, options on ETFs, or options on TIRs in a new expiration year if the national average daily contract volume, excluding LEAP and FLEX series, for that options class during the preceding three calendar months is less than 1,000 contracts, unless the new LEAP series has an expiration year that has already been listed on another exchange for that option class. The preceding volume threshold does not apply during the first six months an equity option class, option on an ETF, or option on a TIR is listed on any exchange.

Further information on the OLPP can be found here: http://www.optionsclearing.com/clearing/industry-services/olpp.jsp

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