…you really do NOT need to go out to that furthest dated LEAP right away. Up to a certain point, the time decay on the 2010s will be roughly similar to the 2011s so there really isn’t that much of a benefit to buying the 2011s. Once they start to really diverge, then you just roll forward your 2010s to 2011s. Any interim price action really doesn’t matter much either because the deltas for the same strike price are also going to be roughly similar. It is potentially an additional set of transactions, but if you are right on something like LEAPs the commissions should be negligible.

MDCigan TMF Liquid Lounge

Here is the 2011 Leap schedule from CBOE

• January cycle begin trading on September 15 2008
• February cycle being trading on October 13 2008
• March cycle begin trading on November 17 2008

MDCigan’s thesis that time decay and delta on far out Leaps will be roughly similar and thus the higher cost of the longest dated Leaps is not worth paying for sounds plausible due to the exponential nature of time decay. However, I would like to test this thesis. As the 2009 Leaps are now so close and I don’t have easy access to historical LEAP prices I’ll wait until September to start validating this thesis.

I have spot checked some 2009 Leaps/options in comparison to 2010 Leaps and the theta on the 2009’s were 40%-80% higher, i.e. the time decay on the 2009’s is 40%-80% higher.

As LEAPS Trading points out

It will take a LEAP with 3 years before expiration 273 days before it will loose 20% of its value due to time decay. At 180 days before expiration it will take only 65 days to loose 20% of its value to time decay.

For more on LEAPS check out the CBOE Index Leaps primer.

Option Cycles for Beginners

Options trade in one of three cycles; January, February or March. There are at least four different expiration months available for every stock on which options trade. The stock options cycle determines which months will be available.

JAJO – January, April, July, and October
FMAN – February, May, August, and November
MJSD – March, June, September, and December

The CBOE decided that every stock* would have the current and following month available for trade.

It is June now so every stock* will have June and July options available. Then the option cycle determines what other expiration months are available. January cycles will also have October, February will have August and November while March will have September and December.

The easiest way to tell what cycle of options your stock has is to check the expiration months available. Take a look at Amgen options http://finance.yahoo.com/q/op?s=AMGN

It has June, July and October so it must be a January cycle. Hopefully, you realise it was October that told me that, as all stocks will currently have June and July.

As optionsvueresearch.com states

Option expiration cycles for stocks may seem a bit confusing, but if you take a little time to understand them they become second nature. It can be very important to know what expiration months will become available in the future. Many option strategies require you to make adjustments during the life of a trade, and you need to be certain the contracts you will need are going to be available. Understanding the expiration cycles is just one more way to help you increase your success rate when trading options.

* on which options trade

Related posts:

1. 2011 LEAP Schedule and Info
2. Day Three: Ten of the Biggest Mistakes in Option Trading
3. Day Two: Ten of the Biggest Mistakes in Option Trading
4. Day Six Part 2: Ten of the Biggest Mistakes in Option Trading
5. Day Four: Ten of the Biggest Mistakes in Option Trading
6. Day Six: Ten of the Biggest Mistakes in Option Trading