The Expiry Date in Derivatives Trading
To avoid any ambiguity or confusion among traders, the Indian stock exchange has a fixed standard expiry date for the F & O market. It is the last Thursday of every month.
For example, if you buy a futures contract on the 14th of January 2022, the expiry date of the contract would be the 27th of January 2022, the last Thursday of the month.
If, however, the last Thursday of the month is a trading holiday, i.e., the stock market remains closed on that day, the previous day would be considered to be the expiry date, i.e., the last Wednesday of the month.
Note - NSE has decided to shift Nifty Bank F&O Expiry to Friday from Thursday
NSE has set forth that it is changing the F&O expiry of Nifty Bank from Thursday to Friday. This will be effective from July 14, 2023.
As per the new rule, the weekly expiry of Nifty Bank contracts will take place every Friday.
In case there is a trading holiday on Friday, then the previous trading day will tend to become the expiry day.
NSE has reduced the market lot size for Nifty Bank F&O to 15 from 25. This latest rule will be applicable from the commencement of July 2023 contracts.
On the expiry date, here’s what happens in the different types of derivatives contracts –
In the case of options contracts, you are not bound to fulfil the contract. As such, if the contract is not acted upon within the expiry date, it simply expires. The premium that you paid to buy the option is forfeited by the seller. You don’t have to pay anything else.
Under the futures contract, you would have to fulfil the contract on the expiry date. This can be done in either of the two ways –
- You can buy another contract that cancels out your futures contract. For instance, say you bought a futures contract to buy 1000 shares of XYZ company.
On the expiry date, you can buy another futures contract to sell 1000 shares of XYZ company.
This new contract nullifies the first contract to sell the shares and would hold valid. In such cases, however, you would have to settle the price difference, if any. The reason for the price difference is the difference in the price of the futures contract. Since share prices fluctuate each day, the price of the futures contract also changes depending on the stock price movements.
So, the futures contract that you buy first might have a different price than the futures contract that you buy later. In such cases, you would have to settle the price differential to settle your contract on the expiry date.
- You can pay the cash settlement for the futures contract. For instance, if you have bought a futures contract to buy 1000 shares of XYZ company, on the expiry date you would have to pay the amount required to close the futures contract.You would have to buy the specified shares and pay for their value.
Effect of the Expiry Date on the Stock Price
Since the expiry date marks the closure of F & O contracts, there is considerable volatility on the stock exchange as a whole. Depending on the nature of the derivatives contracts settled on the expiry date, the stock market might turn bullish or bearish.
Furthermore, arbitrage trading also affects the stock market prices close to the expiry date. Arbitrage trading is when F & O traders assess the performance of the underlying assets of the contracts before the expiry date.
F & O Traders also trade on the secondary markets for maximum profitability. They might buy from the secondary market and sell on the F & O market or vice-versa.
This buying and selling causes price fluctuations and impacts the overall stock market. This impact, however, is short-term in nature as the stock market corrects itself once the expiry date is over.
The Bottom Line
If you are trading in futures and options, know the expiry date of the derivative contracts that you buy. The expiry date determines the settlement of your contracts and you should know what happens on that date.
Moreover, as a stock trader, you should know the impact of the expiry date on the stock market as a whole. You can either book short-term profits due to enhanced volatility near the expiry date or avoid trading altogether to minimize losses.
So, understand the concept, know its impact and then make the right trading decision.
FAQs
In the case of options contracts, you are not bound to fulfil the contract. As such, if the contract is not acted upon within the expiry date, it simply expires. The premium that you paid to buy the option is forfeited by the seller. You don't have to pay anything else.
What happens to stocks on options expiration day? ›
When stock options expire, the contract becomes null and void – as we said earlier. But if you're in the money, it's likely your contract will be exercised automatically. In these cases, your contract is converted into shares of stock at the strike price.
Is it good to buy options on expiry day? ›
As the expiry day approaches, the value of an option contract decreases due to time decay. This means that waiting until the last minute to purchase options can significantly reduce potential profits.
Can you sell a call option on the day of expiration? ›
When expiration hits, the investor has a few choices, including selling the option, exercising it, or letting the contract expire worthless. Keep in mind, though, that if the option is in the money (even by a penny), the broker automatically exercises it. That is, unless, the option holder instructs them not to do so.
What happens if I don't exit the option on expiry? ›
If you don't sell your options before expiration, there will be an automatic exercise if the option is IN THE MONEY. If the option is OUT OF THE MONEY, the option will be worthless, so you wouldn't exercise them in any event.
What happens on F&O expiry day? ›
In the case of options contracts, you are not bound to fulfil the contract. As such, if the contract is not acted upon within the expiry date, it simply expires. The premium that you paid to buy the option is forfeited by the seller. You don't have to pay anything else.
How are options settled on the expiry date? ›
Exercising an option happens in two ways - voluntary or automatic. When the option holder decides to exercise the option upon expiry, it is a voluntary exercise. If the option is in-the-money, it will be automatically exercised. All option contracts in India can only be exercised at expiry.
How to make money on expiry day? ›
Execute the option: On expiry day, if the stock price is favorable, you can choose to exercise your call option, buying Company XYZ's stock at the strike price. Alternatively, you can sell the option contract itself in the market if it has gained value. Manage the risk: It's essential to manage your risk.
What happens if we don't sell futures on expiry? ›
Futures contracts need to be settled before the expiration date to avoid penalties. However, there is no penalty on not settling an options contract before the expiration. You can simply let the contract expire if you wish not to buy or sell the asset.
What happens if you buy an option and it expires? ›
When options expire, in-the-money options are typically exercised automatically, leading to the purchase or sale of the underlying asset at the strike price. Meanwhile, out-of-the-money options expire worthless, resulting in the loss of the premium paid by the holder.
The Expiry Day Option Selling Strategy involves selling options on their expiration day, capitalizing on the rapid time decay of option premiums. Traders sell these options expecting them to expire worthless, allowing them to pocket the premium as profit with minimal movement in the underlying asset.
Can I buy options that expire the same day? ›
Same day options trading, colloquially known as zero days to expiration or “0DTE,” has grown in the past year, but it is hardly a new phenomenon. After all, any option, at some point in its lifetime, will offer the opportunity to trade on its day of expiration.
What time do options expire on expiration day? ›
On expiration day, options will be automatically exercised if they're ITM by $0.01 or more as of the 3 p.m. CT price. In general, the option holder has until 4:30 p.m. CT on expiration day to exercise the contract.
Which options become zero on expiry? ›
Options payoff at expiry
| Options at expiry | Long call | Short put |
|---|
| At-the-Money Options | Option value is zero so the premium paid is the loss incurred. | Will receive the premium |
| Out-of-the-Money Options | Option value is zero so the premium paid is the loss incurred. | Will receive the premium as profit |
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If the option goes to 0, you'll lose whatever you paid for it. You can't sell it while it's at 0 because no one wants to buy it. Note, an option worth 0 won't be 0 if there's a buyer.
What happens if call option doesn't hit strike price? ›
However, the call option expires worthless if the stock price is below the strike price at expiration. For example, using the December 2023 $45 call option from before, the option would be worth $5 per contract if the underlying stock finished expiration in December at $50, or $50 minus $45.
What happens if you don't sell option by expiration? ›
An option contract, in contrast to stock, has an end date. It will lose much of its value if you can't buy, sell, or exercise your option before its expiration date. An option contract ceases trading at its expiration and is either exercised or worthless.
What is the option trading strategy for expiration day? ›
An Expiry Day Option Buying Strategy involves purchasing options on their expiration day when premiums are usually lower due to time decay. Traders aim to profit from sudden, significant movements in the stock price, which can lead to high returns on these lower-cost options.
What if there is no buyer for options on the expiry date? ›
Brokerage will be charged on both sides, i.e. when the options are bought and when they are settled on the expiry day. Contracts expiring OTM - OTM option contracts expire worthlessly. The entire amount paid as a premium will be lost.
What happens if you don't have enough money to exercise options? ›
If for any reason we can't sell your contract, and you don't have the necessary buying power or shares to exercise it, we may attempt to submit a Do Not Exercise request to the Options Clearing Corporation (OCC), and your contract will expire worthless.
