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Options FAQ: LEAPS® & Cycles

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LEAPS® & Cycles Questions

• What are cycles and how are they affected when LEAPS® are listed?
• Where can I find information on LEAPS® options and various strategies based on LEAPS®?
• 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?
• 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®?
• When are the exchanges going to list 2011 LEAPS®?
• Why are near-term LEAPS® symbols converted?
• What happens during a LEAPS® ''rollover?"
• Where can I get a complete LEAPS® list?

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:

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...

...the above months are listed.

After January expires...

...September is added to Cycle 3.

After February expires...

...October is added to Cycle 1.

After March expires...

...November is added to Cycle 2.

After April expires...

...December is added to Cycle 3.

After May expires...

...January is added to Cycle 1.

After June expires...

...February is added to Cycle 2.

After July expires...

...March is added to Cycle 3.

After August expires...

...April is added to Cycle 1.

After September expires...

...May is added to Cycle 2.

After October expires...

...June is added to Cycle 3.

After November expires...

...July is added to Cycle 1.

After December expires...

...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.

• First, if you want to receive a notice when information is made public about an option adjustment, you may sign up with the OIC’s automated e-mail system at http://optionseducation.org/resources/email_alerts.jsp.
• Second, if you are unsure whether an option has been adjusted, you can visit the OIC Market Data area. This will bring you to the Information Memos section that explains how a contract may be adjusted. (This is also a great place to learn about previous adjustments due to splits, spin offs and mergers.)
• Third, always check with your brokerage firm before placing the option trade.
• Fourth, you can call the Options Investor Services at 1-888-OPTIONS for further explanation of those Information Memos.

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 2011 LEAPS®?

A: January expirations for Cycle 1 are normally listed after the May options expire. Since January 2009 LEAPS® are already trading, the following schedule is used to introduce a new series of LEAPS®:

Cycle 1:

• Monday, May 12: January 2009 LEAPS® convert*
• Monday, May 19: Regular January Cycle 1 expirations listed
• Tuesday, May 27: January 2011 LEAPS® listed (May 26th is Memorial Day holiday)

Cycle 2:

• Monday, June 16: January 2009 LEAPS® convert*
• Monday, June 23: February expirations listed
• Monday, June 30: January 2011 LEAPS® listed

Cycle 3:

• Monday, July 14: January 2009 LEAPS® convert*
• Monday, July 21: March expirations listed
• Monday, July 28: January 2011 LEAPS® listed

*To convert: change the symbol on a LEAPS® option to that of a 'normal' option. The terms of the option itself do not change.

Q: Why are near-term LEAPS® symbols converted?

A: To facilitate the introduction of new, next year's LEAPS® - 2006 LEAPS® convert to "regular" option symbols and this paves the way for the 2008 LEAPS® to be listed.

For more information on LEAPS®, please refer to the following links:

• LEAPS®: Options for the Long Term
• LEAPS® & Cycles FAQ
• LEAPS® Conversions

Q: What happens during a LEAPS® ''rollover"?

A: This is a procedure where the nearest term LEAPS® symbols change their symbols to those of the nearest term options. For example, the 2007 Harley-Davidson symbol OAI "rolls over" to the near term symbol "HDI." The terms of the contract do not change - they are still January 2007 options. This procedure takes place for each Cycle on the Monday of expiration week during May, June, and July to make way for the next year's LEAPS® - in this case the 2009 options. Because HDI is a Cycle 2 option, this will take place in June. You can read more about LEAPS® and Cycles here:

• LEAPS®: Options for the Long Term

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

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

• http://optionseducation.org/resources/leaps/complete_leaps_list.xls (XLS)

Confused? Have a question? If you're having trouble grasping a concept or if this page doesn't answer a question, feel free to call 1-888-OPTIONS (between 7:30 a.m. - 5 p.m. CT), or email options@theocc.com to ask your question. You may also visit our Help Center for more information.