The nearest term stock option is referred to as the front month. In a four-week expiration cycle, it is the option that expires in less than four weeks. Front month options attract the most volume and the bid/ask spreads tend to be tighter. Speculators like buying options that don’t cost much on a dollar basis and can double or triple in a short period of time. These moves need to take place quickly because the option to lose value on a daily basis if the stock trades in a great range. Premium sellers like to sell front month stock options so that they can take advantage of accelerated time premium decay. Options tend to hold their value fairly well until they become front month. Institutions are rolling out of front month options and into back month options so that they can maintain their positions. Market Makers try to capitalize on short-term arbitrage opportunities and they execute conversions, reversals and box spreads. All of these activities increase the liquidity of front month options. Almost all stock and cash-settled index options expire after the close on the third Friday of the month.
Front Month Option Term
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November 11, 2008
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