An option cycle is the period of time in which an option to buy stock remains good. During the option cycle, the owner of the option has the right - but not the obligation - to buy stock at a given price. When the option cycle expires, the person who owned the option no longer has an option to purchase the given stock.
An option refers to the right to buy stock at a given price. For example, an individual may have an option to buy a share of ABC stock at $15.00. ABC stock may currently be at any price, from $10.00 to $20.00. If an individual purchases an option to buy stock at $15.00 when the stock is at $20.00, the option is said to be "in the money" because the investor has an option to buy the stock at a lower price than it is currently selling for.
Options are sold on various stock exchanges to investors. Like stocks, the price of an option contract is based on demand for the option. An option that is "in the money" will cost more than an option in which the price to buy is higher than the stock. For example, an option to buy stock ABC at $20.00 when it is at $15.00 would not cost as much as an option to buy stock ABC at $16.00.
The further away from the price of the stock the option is, typically the less it will cost to buy the option. This creates leverage. Investors can purchase options rather inexpensively, and if the stock reaches a higher price than the before the option cycle end, the investor can earn a large return on his investment.
When an investor buys an option, he can exercise the option at any point in time during the option cycle. To exercise the option means to actually buy the stock. For example, if the investor exercises the option to buy stock ABC at $20.00, he will need to pay $20.00 per share to buy the stock.
Traditionally, an option cycle lasted nine months. This meant that when someone purchased an option to buy a stock at a certain price, he had nine months in which to exercise the option. Now, although options cycles can last varying lengths of time on differen stock indexes, there are still three common options cycles: January, April, July and October (JAJO); March, June, September and December (MJSD) and February, May, August and November (FMAN).
