Exchange-traded (or “listed”) put and call options today can be used by investors and traders to speculate, to hedge, to spread risk or to generate passive income. Recently, even more options possibilities have become available with the introduction of options that expire on more different dates than ever. This is desirable for traders who want to nail down an exact date for an option expiration to coincide with another position’s ending date.
In brief, options now exist that expire on Wednesdays and Mondays, as well as Fridays, for a select few underlying assets. Before we discuss the timing of options expirations, here is a brief timeline of the different option expiration cycles and when they were introduced:
The History of Options Trading
1973 – Call options (no puts) begin trading on the Chicago Board Options Exchange (CBOE), an outgrowth of the Chicago Board of Trade. Initially options on just 16 stocks are allowed. Options expire on the third Friday of the month. In future years these third-Friday options will come to be called the Monthly options. They are settled on Saturday morning each month (the day after option expiration day).
1977 – Put options are offered for the first time alongside Calls. Still monthlies only.
1983 – Cash settled index options trading begins based on the S&P 500 index or SPX. Still only monthlies, but with a slightly different expiration date. The options stop trading at the end of the market day before the third Friday (Thursday), expire on Friday, and are settled on Saturday based on the index opening level from Friday morning.
1990 – LEAPS®, options on equities, with longer-term expirations, are introduced. They work just like regular monthlies, but with option expiration months farther in the future.
2005 – Weekly option expirations are introduced. These expire on Fridays that would not otherwise be a monthly or quarterly expiration. At first all weekly options have a lifespan of eight days. They appear on Thursday and expire on the Friday of the following week.
2006 – CBOE introduces Quarterlys — options that expire at the end of calendar-year quarters (March, June, September and December), even if that day is not a Friday.
2006 – Monthly options on the VIX index, which is itself a measure of the volatility of options on the SPX, begin trading. The VIX provides a 30 day expectation of volatility. The underlying asset for the VIX options is not the VIX index itself, but futures contracts on the VIX index. The options have a unique expiration. For technical reasons they must expire exactly 30 days before an SPX options expiration date. Since SPX option expiration dates are on Fridays, the VIX options expiration dates are on Wednesdays (30 days = 4 weeks and two days prior to a Friday date).
2012 – CBOE announces the expansion of the number of Weeklys that can be listed for certain securities. There can now be up to five consecutive Weeklys, expiring on future Fridays that do not coincide with monthly or quarterly expirations that already exist.
2013 – Expiration processing of standard options moves from Saturday morning to Friday night. Same-day settlement has finally arrived, forty years after options began trading.
2014 – The number of weeklys is expanded to six consecutive weeks for certain underlying assets.
2016 – For options on one specific underlying asset (SPX), weekly options with Wednesday expiration dates are added, to align with the Wednesday VIX options.
2016 – Wednesday weeklys for SPY (the exchange-trading fund that tracks the SPX) are added.
2016 – Monday weekly options expirations on SPX are added.
Yikes! Where will it end? Are we headed for expirations every day?
Actually, there’s no technical reason why not. Theoretically, the value of an option that expires at any given second in the future can be calculated. There doesn’t really have to be any fixed set of dates on which options expire – that’s just a legacy from the days of primitive computing. I can envision a system where a trader enters a date/time when he wants the expiration to be, and the appropriate custom option is created in real time. Kind of like the difference between waiting on the corner for a bus that runs once a week, vs. calling Uber to pick you up whenever you want.
Continuously available options are really only a few small steps from what happens now. All options are created as needed anyway – they don’t have any real physical existence. When I sell an option short, I conjure it from thin air and sell it to someone. Later, when I buy to close out that position, that option contract is destroyed. It could just as well expire at 2:46AM on Thursday as any other time. If I wanted to sell one, all that would be needed is someone who happens to want to buy an option that expires at 2:46 on Thursday. That is actually no obstacle either. The other party to most trades that you or I, or any option trader makes is an option market maker, not another actual trader. And it’s really the option market maker’s computer system I’m dealing with, so why not?
I believe that something like this is likely to come to pass, just as 24/7 markets for stocks and other securities are not far off. It all means more opportunities for traders who know what they’re doing.
Until next time, remember to keep your options open.