Option Round Time Length Natural Selection Time Length Selection
Time Length Selection
I use the MVP Option Methodology research presented in Chapter 5 of the MVP book to choose stocks for a call option purchase. When I discover a stock that meets the MVP selection factors and come to a decision to purchase a call option, I then decide on a choice time length (expiration date). Let’s inspect how option cycles can help us
choose the time length of a choice.
Option Cycles
There are three different option expiration cycles. The 1st expiration cycle is the Jan, April, July and October expirations. The second cycle is the Feb, May, August and November expirations and the third cycle is the March, June, September and December expirations. I studied share price data on monthly option expiration day in order to work out how far out or which expiration month I should use when I decide to get a call option on a stock.
As an example, Apple symbol AAPL qualifies as a MVP Option Method stock. Apple options use the Jan, April, July and October expiration cycle. The Apple Jan, April, July and October options customarily become available to trade 6 months prior to expiration. Like most other choices, Apple also trades monthly options for all 12 months of the year but the monthly options that aren't in the Apple January, April, July and October expiration cycles don't become available to trade till 2 months before the monthly expiration.
For instance, Apple February options become available for trading two months prior in December and Apple March options become available in Jan. There also are Leaps options available for Apple which are long term options. JUMPS options become available for trading 1 to 2 years prior to expiration.
Option Expiration Price Info
The price table below displays the price of Apple stock on option expiration day every month in 2007. Option expiration day is normally the 3rd Friday of the month. It also exhibits the price change percentage for the one month, 3 month and 6 month periods that correspond with the Apple option expiration cycle. For instance, On Friday Jan 19th 2007 Apple stock was trading at 88.50 on option expiration day. On Friday Feb 16th 2007 Apple stock was trading at 84.80 on option expiration which equates to a 4.2% decline over the one month period. On April 20th 2007 apple stocks was trading at 91.0 which represents a 2.8% return over the 3 month period between January 19th and April 20th. On July 20th 2007 Apple stock was trading at 143.7 which represents a 62.4% return over the 6 month period between January 19th and July 20th.
I use more than 60 months of option expiration price data to research the precision of the monthly, 3 month, 6 month and LEAPS option cycles. If I buy a call option, this expiration price info helps me pick which Apple option expiration or time length I should use based mostly on the percent of times Apple stock increased in price in that cycle. For instance, Apple stock increased in price 90% p.c of the time for the 6 month option cycle from Jan to July and July to Jan. Apple stock increased in price 75% of the time for the 3 month cycle between January, April, July and October. If you traded monthly options, Apple increased in price 69% of the time. Based totally on this information I'd trade the 3 or 6 month options for Apple when Apple qualifies under the MVP Option Strategy rules*. Longer term backers may consider purchasing Apple LEAPS options as Apple stock increased in price 100% of the time in the one year Leaps option cycle.
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