Monthly options are standardized contracts, each covering 100 shares of an underlying stock, that expire on the third Friday of their listed expiration month. Every optionable stock is assigned to one of three quarterly expiration cycles, which decides which further-out months you can trade. These contracts carry the deepest liquidity of any expiration type on the listed options market, and knowing how the cycles, expiration mechanics, and tax rules fit together puts you well ahead of a trader who picks a month because it looks close enough.
The Three Expiration Cycles
Every optionable stock sits on one of three quarterly cycles:
- January cycle: January, April, July, October
- February cycle: February, May, August, November
- March cycle: March, June, September, December
At any point you can trade options expiring in the current month and the following month regardless of which cycle the stock is on. Beyond those two near-term months, the next two listed expirations come from the stock’s assigned quarterly cycle. If a stock is on the January cycle and you’re looking in early March, you would see March, April, July, and October as the available monthly expirations. The system keeps exchanges from having to list every possible month on every stock, which would spread liquidity too thin.
You can identify a stock’s cycle quickly. Pull up its option chain and look at the two furthest-out monthly expirations. If those fall in the first month of each quarter, the stock is on the January cycle; second month means February cycle; third month means March cycle. Many heavily traded names also list weekly expirations and long-term contracts (LEAPS) on top of the standard monthlies, but the quarterly cycle still governs which standard monthly contracts appear.
Third Friday Expiration
Every standard monthly option expires on the third Friday of its expiration month. If that Friday falls on a market holiday, expiration shifts to the Thursday immediately before. The Options Clearing Corporation acts as the central counterparty for every listed option trade and manages settlement around these dates.1The Options Clearing Corporation. The Options Clearing Corporation Disclosure Framework for Financial Market Infrastructures
On expiration Friday, monthly equity options stop trading at the regular market close of 4:00 PM Eastern Time. After that cutoff, the OCC processes exercise and assignment notices, and any position you haven’t closed or given your broker specific instructions about becomes subject to automatic exercise rules. The deadline matters because options lose time value at an accelerating rate in the final days before expiration, and bid-ask spreads on near-expiration contracts can widen sharply in the last hour of trading.
What a Monthly Contract Actually Is
Each standard equity option contract covers 100 shares of the underlying stock. A call gives you the right to buy those shares at the strike price; a put gives you the right to sell them. One point of premium equals $100, so a contract quoted at $2.30 costs $230 before commissions.2The Options Clearing Corporation. Equity Options Product Specifications
The OCC stands between buyer and seller on every trade, becoming the buyer for every seller and the seller for every buyer. This eliminates the risk of your counterparty defaulting, because the OCC guarantees performance on every contract.1The Options Clearing Corporation. The Options Clearing Corporation Disclosure Framework for Financial Market Infrastructures
Most equity options in the U.S. are American-style, meaning you can exercise them at any point before expiration rather than only on the expiration date.3The Options Industry Council. What Is the Difference Between American-Style and European-Style Options? European-style options, exercisable only at expiration, are mostly limited to index options. Each contract remains a binding obligation until you close it in the market, exercise it, or let it expire worthless.
Reading the Option Chain
An option chain is the grid your brokerage shows when you search a stock’s ticker for available contracts. It lists every strike price organized by expiration month, with calls on one side and puts on the other. The core columns are the bid (what a buyer will pay you), the ask (what a seller demands from you), and the last traded price.
Two columns beginners often skip are volume and open interest, and ignoring them is a reliable way to get a bad fill. Volume counts contracts traded during the current session; open interest shows contracts still outstanding from prior sessions. A strike with high open interest and steady volume usually has a tighter bid-ask spread, so you lose less to the spread when entering and exiting. A strike with open interest of 12 and no volume today will trade with a wide spread and be hard to close later.
The Greeks quantify how sensitive a contract’s price is to different variables. Delta estimates how much the option’s price moves per $1 change in the underlying stock. Theta measures daily time decay, roughly how much value the contract bleeds each day just by existing. A monthly option with 45 days to expiration decays much more slowly than one with 7 days left, and Theta makes that difference visible on the screen.
Getting Approved and Funding the Trade
Before you can trade any options, your brokerage must approve your account for a specific options level. Most brokers use a tiered system, typically running from Level 1 (covered calls and cash-secured puts) through Level 4 or 5 (uncovered writing and complex spreads). Approval involves a questionnaire about your experience, income, net worth, and objectives. Higher levels are harder to get, and brokers can deny applications that don’t show enough experience.
If you’re buying options, federal Regulation T requires you to pay for them in full. Long options are not marginable, meaning you cannot borrow against them the way you can with stock purchases.4eCFR. Credit by Brokers and Dealers (Regulation T) A contract quoted at $3.00 costs $300 in cash. Selling options involves margin requirements set by exchange rules, and those requirements vary by strategy.
Active traders also need to watch the pattern day trader rule. If you execute four or more day trades within five business days and those trades represent more than 6% of your total activity in a margin account during that period, FINRA classifies you as a pattern day trader. Once classified, you must maintain at least $25,000 in equity in that account on every day you day trade, and your account gets restricted if you fall below that level.5FINRA. Day Trading Your brokerage can impose stricter thresholds on top of FINRA’s minimums.
Placing and Closing Orders
Opening a position uses one of two actions: “Buy to Open” if you’re purchasing a call or put, or “Sell to Open” if you’re writing one. Closing works in reverse: “Sell to Close” liquidates a long position, and “Buy to Close” covers a short one. Getting these labels wrong can double your position instead of closing it, so verify the action before submitting.
The two most common order types are limit orders and market orders. A limit order sets the maximum you’ll pay when buying or the minimum you’ll accept when selling, and it only fills at that price or better. Market orders execute immediately at whatever the current best price is. For options, limit orders are almost always the better choice because bid-ask spreads can be substantially wider than on stocks, and a market order in a wide spread can fill at a painful price. Stop orders are also available and convert to market orders when a specified price is reached, which carries the same spread risk on execution.6Investor.gov. Types of Orders
Per-contract commissions at major brokerages are commonly around $0.65 per contract with no base commission for online trades.7Charles Schwab. Pricing and Account Fees A 5-contract trade would run $3.25 in commissions each way, so $6.50 round trip. Small regulatory fees also apply but are typically pennies per contract. These costs matter more for lower-priced options, where a $0.65 fee on a $0.30 contract eats a significant share of potential profit.
What Happens at Expiration
Automatic Exercise
The OCC uses a procedure called “exercise by exception” that automatically exercises any expiring option that finishes in the money by at least $0.01 per share. If you hold a call with a $50 strike and the stock closes at $50.02 on expiration Friday, the OCC exercises that contract without any instruction from you.8The Options Industry Council. Options Exercise You’ll be buying 100 shares at $50 each, requiring $5,000 in purchasing power. If your account can’t support that, your broker will typically close the position before expiration or liquidate the shares immediately after.
You can override automatic exercise by submitting a “Do Not Exercise” instruction to your broker before their cutoff, which is often earlier than the OCC’s own deadline. Brokers may also set thresholds that differ from the OCC’s $0.01 standard, so check your firm’s specific expiration procedures.8The Options Industry Council. Options Exercise Forgetting an expiring in-the-money option is one of the most common and expensive beginner mistakes in options trading.
Settlement
When an equity option is exercised, the resulting stock transaction settles on a T+1 basis, meaning the next business day after the trade.9FINRA. Understanding Settlement Cycles: What Does T+1 Mean for You? If your call is exercised on expiration Friday, you own the shares and owe payment by Monday. For puts, the shares leave your account and you receive the cash on the same timeline. Option premium transactions themselves also settle on a T+1 cycle.
Early Assignment Risk
Because most equity options are American-style, anyone who has sold an option can be assigned at any time before expiration, not just on the expiration date. In practice, early assignment is uncommon except in one specific situation: when the underlying stock is about to go ex-dividend. If you’ve sold a call and the remaining time value is less than the upcoming dividend, the call holder has a financial incentive to exercise early to capture the dividend. This typically happens the day before the ex-dividend date.10Fidelity. Dividends and Options Assignment Risk
If you’re assigned on a covered call, you deliver your shares and miss the dividend. If the call was uncovered, you must buy shares at the market price to deliver them and still owe the dividend. The safest defense is buying back the short call before the ex-dividend date if keeping the shares and the dividend matters to you. Waiting until the ex-date itself may be too late, since assignment can happen at any point once exercise becomes profitable.10Fidelity. Dividends and Options Assignment Risk
How Monthly Options Are Taxed
Capital Gains and Losses
Profits and losses from buying and selling options are taxed as capital gains or losses. If you held the option for one year or less before closing it, any gain is short-term and taxed at your ordinary income tax rate. Holdings exceeding one year qualify for the lower long-term capital gains rate.11Internal Revenue Service. Topic No. 409, Capital Gains and Losses In practice, standard monthly options almost always produce short-term gains because their lifespans rarely exceed a few months. LEAPS are the main exception, since they can be held beyond the one-year mark.
When an option expires worthless, the buyer realizes a capital loss equal to the premium paid. The seller realizes a short-term capital gain equal to the premium received, regardless of how long the position was open. If an option is exercised rather than closed, the premium doesn’t generate a separate taxable event. It gets folded into the cost basis of the stock transaction: for a call buyer who exercises, the premium is added to the purchase price of the shares; for a put buyer, it reduces the sale proceeds.
The Wash Sale Rule
The wash sale rule prevents you from claiming a tax loss if you buy a substantially identical security within 30 days before or after selling at a loss. The IRS treats acquiring a contract or option to buy substantially identical securities as a triggering purchase.12Investor.gov. Wash Sales If you sell a call option on XYZ stock at a loss and buy another XYZ call within that 30-day window, the loss is disallowed. The disallowed loss gets added to the cost basis of the new position, so it’s deferred rather than permanently lost, but it disrupts tax planning if you weren’t expecting it. Traders who roll monthly options from one expiration to the next on the same underlying stock run into this rule constantly.