Question

1.A stock option is on the February cycle. What options trade

A. On April 1

B. On May 30

Answer 1

In order to know which options trade on April 1 and on May 30, we need to have knowledge about stock option cycle.

Stock option cycle is the cycle which defines the time period on which the option contracts expire. There is a specified time period set for every option contract after which the contract is no more valid. It includes a set of months on which the contract optins expire. The option contract is usually applicable on stocks, commodities, debt instruments and currencies as well in which we can pay a fixed price to secure us from any loss in future due to decrease in value to the instrument in which we have invested.

There are three option cycles which are available for all the option contract which defines their expiration period. The detail of all the three cycles is as below

a) Cycle 1 : This cycle includes months of January, April, July and October also known as JAJO

b) Cycle 2 : This cycle includes months of February, May, August and November also known as FMAN

c) Cycle 3 : This cycle includes months of March, June, September and December also known as MJSD

As per the basic formulation of the above cycles any option which is assigned on January month cycle will have the contracts available in January, April, July and October and so on for the cycle 2 and cycle 3 as well. Also there are forward two months option applicable for the contract option cycle.

For example, in August the availability of cycle one contract would be August, September, October and January. Here we can see that initially we learned that option cycle 1 is assigned months of January, April, July and October but when the month passes of cycle 1, the forward two months are assigned in which the contract option can be utilized. But it is important to note that the cycle of the option contract . The month which follows until the month of the cycle 1 occurs are taken.

Now as per the given question:

A stock option is on the February cycle. What options trade on

1) April 1 : The Feb cycle includes months : February, May, August and November

So on April 1 which is Cycle 1 month the option contract availablity of Feb cycle contract will be

April, May, August and November

Here as two months forward are available for any option contract, the April month being the 1st month after which May which falls in the Cycle 2 which is the original cycle of the Feb contract option starts, so we from here on consider the months available that are May, August and November

2) May 30 : The Feb cycle includes months : February, May, August and November

So on May 30 which is the end of the month, the next month that is June will fall first and then followed by July after which the cycle 2 month starts that is August and the followed by November

So on May 30 the option contract of Feb cycle will be available for June, July, August and November.