What Is Quarterly Options?
Quarterly options are a type of options contract that expire on the last business day of March, June, September, and December. These financial instruments fall under the broader category of derivatives, as their value is derived from an underlying asset like stocks, indexes, or exchange-traded funds (ETFs). Quarterly options provide market participants with specific strategic opportunities due to their fixed, longer-term expiration cycle compared to more frequently expiring options. They can be used for various purposes, including hedging existing portfolios, engaging in speculation on future price movements, or implementing complex trading strategies. Each quarterly option contract typically represents 100 shares of the underlying security.
History and Origin
The modern era of exchange-traded options began in 1973 with the establishment of the Chicago Board Options Exchange (CBOE). This marked a significant shift from the previously unregulated, over-the-counter options market. Initially, options contracts primarily had quarterly expirations, aligning with the traditional financial reporting periods and offering a standardized structure for market participants. The CBOE opened its doors on April 26, 1973, revolutionizing how these derivatives were traded by introducing standardized contract sizes, strike prices, and expiration dates.11,10,
The development of the Black-Scholes-Merton options pricing model, for which Myron Scholes and Robert C. Merton were awarded the Nobel Memorial Prize in Economic Sciences in 1997, provided a robust theoretical framework for valuing these complex instruments.9,,8,7,,6 This mathematical model brought scientific legitimacy to the options market, enabling more sophisticated trading and risk management strategies. While the CBOE later introduced monthly and then weekly expiring options to cater to increasing demand for shorter-term instruments, quarterly options remained a foundational element of the options market structure.5
Key Takeaways
- Quarterly options expire on specific dates: the last business day of March, June, September, and December.
- They are a type of options contract that derives value from an underlying asset.
- Quarterly options are frequently employed for long-term strategies, portfolio hedging, and fundamental-driven positions.
- The fixed expiration cycle can influence their option premium and overall pricing due to the consistent time to expiration from one quarter to the next.
- These options provide diverse opportunities for market participants seeking exposure to an asset's quarterly performance or long-term trends.
Interpreting Quarterly Options
Interpreting quarterly options involves understanding their fixed expiration date and how it influences their value and strategic use. Unlike weekly or monthly options, which offer frequent short-term trading opportunities, quarterly options provide a longer timeframe for an investment thesis to play out. This extended duration means they are typically less sensitive to immediate price fluctuations of the underlying asset and exhibit less volatility decay on a day-to-day basis compared to shorter-dated options.
For investors, the quarterly cycle often aligns with corporate earnings announcements, economic data releases, and broader market trends that unfold over several months. The option premium for quarterly options reflects this longer time horizon, generally being higher than that of shorter-term options, all else being equal. This premium incorporates more potential future volatility and time value. Therefore, interpreting quarterly options requires a focus on the fundamental outlook of the underlying asset over a medium-to-long-term period, rather than on short-term technical indicators.
Hypothetical Example
Consider an investor, Sarah, who believes that Company ABC's stock, currently trading at $100 per share, will experience significant growth over the next six months due to an upcoming product launch and favorable industry trends. Instead of buying the stock outright, she decides to use quarterly options to leverage her bullish outlook.
On June 15, Sarah purchases a call option on Company ABC with an exercise price of $105 and an expiration date in September (the upcoming quarterly expiration). The option premium is $3.00 per share, meaning each contract costs her $300 ($3.00 x 100 shares).
If Company ABC's stock rises to $115 by early September, Sarah's call option is "in the money" (meaning the stock price is above the strike price). She could then choose to:
- Exercise the option: Buy 100 shares of Company ABC at $105 per share, then immediately sell them in the market at $115 for a profit of $10 per share ($115 - $105). Her total profit per contract would be $1,000 ($10 x 100 shares), minus the initial premium of $300, for a net profit of $700.
- Sell the option: The value of her call option would have increased significantly. She could sell the option back into the market for its current intrinsic value plus any remaining time value, likely realizing a profit without needing to purchase the underlying shares.
This hypothetical example illustrates how quarterly options can be utilized to capitalize on anticipated medium-term price movements with a defined risk (the premium paid).
Practical Applications
Quarterly options are integral tools for diverse market participants, from individual investors to large institutional funds. One primary application is long-term hedging against potential declines in a stock portfolio. For example, an investor holding a substantial position in a particular stock might purchase put options with a quarterly expiration to protect against a significant downturn over the coming months. This strategy provides downside protection while allowing the investor to maintain their equity position.
Furthermore, these options are frequently used in income-generating strategies, such as writing covered call options, where investors sell options against shares they already own. The longer quarterly cycle can provide a more consistent income stream compared to very short-term options. Quarterly options are also favored by those engaging in more fundamental-driven trading, where an investor's thesis about an underlying asset's value or future performance might take several months to materialize.
The regulation of options trading, including quarterly options, is overseen by bodies such as the U.S. Securities and Exchange Commission (SEC), which provides investor guidance on the basics and risks of options trading.4 The market infrastructure, including central clearing counterparties (CCPs), ensures the efficient and secure settlement of these derivatives, taking on counterparty credit risk and facilitating multilateral netting of exposures.3,2,1 This robust framework supports the widespread use of quarterly options in capital markets.
Limitations and Criticisms
Despite their utility, quarterly options come with certain limitations and criticisms. The longer time horizon, while beneficial for some strategies, also means that quarterly options generally have a higher option premium compared to shorter-dated options. This higher cost means a greater upfront capital outlay and a larger potential loss if the option expires worthless. The increased premium also requires a more substantial price movement in the underlying asset to turn a profit, making these options less appealing for short-term speculation.
The valuation of options, including quarterly options, relies heavily on complex pricing models like the Black-Scholes-Merton model. While groundbreaking, these models make certain assumptions (e.g., constant volatility, no dividends, European-style exercise only) that do not always hold true in real-world markets. Deviations from these assumptions can lead to discrepancies between theoretical and actual prices, which can affect the expected profitability of an options contract.
Furthermore, while offering more time for a thesis to unfold, quarterly options can still experience significant time decay, especially as their expiration date approaches. This decay, known as theta, erodes the option's extrinsic value, necessitating timely action or accurate directional bets. Investors must continuously monitor their positions and adjust strategies, as holding a deep out-of-the-money option until its quarterly expiration can result in a complete loss of the option premium.
Quarterly Options vs. Monthly Options
The primary distinction between quarterly options and monthly options lies in their expiration cycles.
| Feature | Quarterly Options | Monthly Options |
|---|---|---|
| Expiration | March, June, September, December (last business day) | Every month (typically the third Friday) |
| Frequency | Less frequent expirations, typically four times a year. | More frequent expirations, typically twelve times a year. |
| Time Horizon | Longer time until expiration, often used for medium-term strategies. | Shorter time until expiration, suitable for short-term trading. |
| Premium | Generally higher option premium due to more time value. | Generally lower option premium. |
| Liquidity | Can have good liquidity, but often less than actively traded monthly or weekly options. | Typically exhibit higher liquidity due to their popularity. |
| Strategy Focus | Hedging, longer-term directional bets, fundamental analysis. | Speculation, income generation (e.g., selling covered calls), reacting to near-term events. |
Quarterly options align with broader economic cycles and corporate reporting schedules, making them suitable for investors whose outlook spans several months. Monthly options, conversely, offer greater flexibility and precision for tactical trading strategies and reacting to events that have a more immediate impact on an underlying asset. The choice between quarterly and monthly options often depends on an investor's specific objectives, risk tolerance, and time horizon for their trading or investment thesis.
FAQs
What is the primary difference between quarterly options and other types of options?
The main difference lies in their expiration date. Quarterly options expire on fixed dates in March, June, September, and December, offering a consistent, longer-term cycle compared to weekly or monthly options that expire more frequently.
Can quarterly options be used for short-term trading?
While possible, quarterly options are generally less ideal for very short-term trading due to their higher option premium and slower time decay compared to weekly options. They are better suited for strategies that anticipate movements over several weeks or months.
Are quarterly options more expensive than monthly options?
Yes, all else being equal, quarterly options typically have a higher option premium than monthly options with the same strike price and underlying asset. This is because they have more time until expiration, which means more extrinsic value and a greater chance for the underlying asset to move favorably.