Listen to a Business English Dialogue About Expiration cycle
John: Hey Addison, do you know what an expiration cycle is in finance?
Addison: Yes, it refers to the schedule on which options and futures contracts expire. They’re categorized into different cycles to manage expiration dates.
John: That’s right. Options and futures contracts are grouped into different expiration cycles, such as January, February, or March, to ensure liquidity and orderly trading.
Addison: Are there different types of expiration cycles?
John: Yes, there are typically three types: the January cycle, the February cycle, and the LEAPS (Long-term Equity Anticipation Securities) cycle, each with its own set of expiration months.
Addison: How do expiration cycles affect trading strategies?
John: Traders often consider expiration cycles when selecting options contracts and timing their trades to capitalize on market movements within specific timeframes.
Addison: What role does the expiration cycle play in managing risk?
John: Understanding expiration cycles helps traders manage risk by aligning their positions with the expected timing of market movements and minimizing exposure to time decay.
Addison: Can you explain time decay and its relationship to expiration cycles?
John: Time decay refers to the reduction in the value of an options contract as it approaches expiration. Traders must consider the expiration cycle to avoid losses due to time decay.
Addison: How do traders adjust their strategies based on expiration cycles?
John: Traders may roll over or close out positions before expiration to avoid being exposed to excessive time decay or to capture profits before contracts expire.
Addison: Is there a specific expiration cycle that’s more popular among traders?
John: The monthly expiration cycle, which includes options expiring on the third Friday of each month, tends to be the most actively traded due to its frequent expirations and liquidity.
Addison: Thanks for explaining, John. It’s essential to understand expiration cycles when trading options and futures.
John: Absolutely, Addison. Being aware of expiration dates and cycles helps traders make informed decisions and manage risk effectively.