Did you know there's an option expiration tomorrow? And it isn't in some obscure or exotic trading instrument; in fact, the options in question are tied to the most recognizable benchmark indices, exchange-traded funds, and futures products.

And they aren't new, either.

This Tuesday will mark the third year that quarterly and end-of-month options have been traded in securities such as the Spyder Trust (SPY), NASDAQ 100 Trust (QQQQ), Diamonds Trust Series (DIA), iShares Russell 2000 (IWM), Energy Select SPDR (XLE) and the S&P 500 Index (SPX) options.

It was the CME Group (CME) that initially got the ball rolling 3 years ago when it launched end-of-month options (EOM) on its SPX and S&P E-mini products.

The International Securities Exchange and other option exchanges -- such as the Chicago Board Options Exchange (CBOE) -- rolled out not only quarterly but even weekly options.

A Better Measure of Time

As their name suggests, these options expire at the end each week, month, or quarter, rather than on the standard third Friday of each month. In creating these contracts, the exchanges were responding to hedge funds and institutions that wanted a product that better aligned with their marked-to-market accounting and bookkeeping.

An end-of-month or end-of-quarter option makes using strategies tied to stock -- such as that of simple covered calls or more complex risk-arbitrage positions -- easier and cleaner for calculating returns and presenting end-of-month statements.

This makes a lot of sense to me, and apparently the hedge funds have embraced some of these products -- especially those tied to the S&P 500. But just as the metric system makes a lot more sense than English measures, but hasn't gained much traction, these products are still underused -- and options that expire the third Friday of the month are still the basic industry standard.

The exchanges themselves haven't done much by way of promoting these “metric” options to retail traders, and they've essentially added no new listings since the initial launch. I think they should consider adding a few of the more popular individual stocks, such as Apple (AAPL) and Intel (INTC).

Inserting More Days in the Calendar

While the bulk of trading volume is still in the clunky third Friday variety, 6 near-the-money strikes in the Spyder Trust June quarterly -- which expire tomorrow -- have over 45,000 contracts still open compared to the July series -- which has several strikes with over 200,000 contracts open.

Still, there's enough liquidity in the popular ETFs for retail traders to make use of these quarterly options. One strategy I frequently use in the Spyder is to establish a calendar spread and then use the quarterlies to get an extra expiration cycle.

For example, as I discussed in the OptionSmith product a few weeks back, I bought the July $93 puts and sold the standard June $92 puts. When those Junes expired on 2 Fridays, I had the opportunity to sell quarterly puts -- which at that point, had just 10 days remaining until expiration -- and collect some more premium.

In this way, the calendar spread was able to twice benefit from the acceleration of time decay as expiration approached. In a sense, these options with added expirations insert more trading days into time-sensitive strategies, and provide greater flexibility in managing your portfolio.

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