The expiry date is a term that is used in trading. The expiry date means the last date a stock can be used to trade i.e., for buying and selling. In India, traders can trade in various indices and every index has an expiry day. Suppose you are a trader and usually trade in the derivatives market i.e., NIFTY 50. If you buy a call option or a put option and hold it beyond the expiry day, it won’t be considered valid. The objective for traders is to execute trade orders before the expiry in stock market.
On the expiry date, the derivatives contract expires but sometimes it comes with consequences both for traders and the stock market. Let’s understand how the expiry date impacts the stock market.
In the stock market, expiry dates play a crucial role, particularly in derivatives trading, which includes futures and options contracts. An expiry date is the pre-determined date when a contract becomes void or expires, meaning that all positions in that contract must be settled. Understanding the importance of expiry dates is vital for traders and investors because they directly impact online trading strategies, price movements, and decision-making.
Futures and options contracts involve agreements to buy or sell an asset on a specific future date, with each contract tied to a particular expiry date. For futures, the expiry date marks the final day for trading the contract before the obligations to deliver or settle the asset take effect. Similarly, for options, the expiry date is when the holder must decide to exercise the option (buy or sell the underlying asset) or let the contract expire worthless.
For example, if an investor holds an option contract expiring at the end of September, they must decide whether to exercise it or let it lapse before the expiry date.
As the expiry date approaches, the prices of derivatives tend to become more volatile. This happens because traders and investors rush to either square off or roll over their positions before expiry. This increased activity can lead to sharp price movements, especially in stocks or indices with heavy derivatives trading. The closer the contract is to expiration, the more sensitive the price is to changes in the underlying asset, particularly for options, where time decay plays a significant role.
On the expiry date, traders must settle all open derivative contracts. For cash-settled contracts, the profit or loss is calculated from the difference between the contract price and the underlying asset’s settlement price. In contrast, for physically-settled contracts, the actual delivery of the asset (e.g., shares or commodities) takes place. Traders who are unaware of or unprepared for this can face unexpected outcomes if they do not square off their positions before the expiry.
Many traders choose to “roll over” their positions before expiry, which means closing the current contract and entering into a new contract with a future expiry date. This is common for traders who want to maintain their exposure to a particular asset but don’t want to deal with the settlement process. Understanding the expiry cycle is key to effectively managing positions, particularly in long-term strategies where maintaining exposure is important.
Expiry dates, particularly for option contracts, can influence stock prices in the underlying market. This is due to large institutional traders and market participants adjusting their positions or hedging their risks close to expiry, creating price swings. Known as “expiry day effects”, these can lead to sudden fluctuations in stock prices, especially in stocks with high derivatives trading volume. Index options expiries, such as those of the Nifty or S&P 500, can significantly impact broader market movements.
For both short-term traders and long-term investors, understanding the significance of expiry dates is critical for strategy development. Day traders, for instance, might look to profit from the volatility around expiry, while long-term investors must be aware of how expiry can affect stock prices and market sentiment. For options traders, understanding how time decay affects the premium of the option as expiry approaches can be the difference between profit and loss.
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Expiry dates are a critical aspect of derivative contracts, such as futures and options, as they determine the timeline for when these contracts must be settled or exercised. The approaching expiry affects the behavior of the contracts in several key ways, including price movements, volatility, and the decision-making process for traders.
For options contracts, time value decreases as the expiry date approaches, a concept known as time decay or theta decay. The time value of an option reflects the additional premium an investor is willing to pay for the possibility that the option’s value will increase before expiry. As the expiry nears, this time value diminishes, and the option’s price is increasingly driven by its intrinsic value (the difference between the strike price and the current market price). If an option is out of the money (OTM), meaning it has no intrinsic value, it becomes worthless at expiry.
If an investor holds a call option that is currently OTM with little chance of becoming profitable by the expiry date, its time value will drop sharply, reducing the option’s price.
On the expiry date, all open derivative contracts must be settled. The type of settlement—cash settlement or physical settlement—determines what happens at expiry.
As the expiry date approaches, liquidity in the market can shift significantly, especially in the near-expiry contracts. Traders may find that contracts become either more liquid (as traders rush to adjust or close positions) or less liquid (as interest moves to longer-dated contracts). This fluctuation in liquidity can cause wider bid-ask spreads, leading to potential slippage or challenges in executing trades at desired prices.
Expiry-induced changes in market behavior can also lead to unpredictable price movements, as some market participants aim to manipulate prices near expiry to their advantage, particularly in contracts with low open interest.
On the expiry day, there is often a surge in online trading activity, which can cause significant price movement in both the derivative and the underlying asset, known as the expiry day effect. Large institutional traders and hedge funds may adjust their positions en masse, creating heavy fluctuations. Additionally, certain price levels may become pivotal as traders attempt to keep their positions in profit, leading to an increase in price sensitivity during the final hours of online trading before expiry.
The final settlement price is determined on the expiry date and is used to calculate the profit or loss on a derivative contract. For futures, it is based on the spot price of the underlying asset at the end of online trading on the expiry day. For options, it depends on whether the option is in the money (ITM) or out of the money (OTM). Knowing how the final settlement price is calculated is crucial for traders, as it determines the ultimate payout from the contract.
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Expiry days in the stock market are important as they mark the last day that derivative contracts (futures and options) can be traded or exercised. In India, the National Stock Exchange (NSE) has specific expiry days for various indices, and these days often see heightened volatility and online trading activity. Let’s explore the key expiry days for major indices:
The Nifty 50 index, which represents the top 50 companies listed on the NSE, has its derivatives contracts (futures and options or f/o) expiring every Thursday of the week. If the last Thursday falls on a trading holiday, the exchange moves the expiry to the previous trading day. Nifty expiry day is crucial, as Nifty 50 ranks among India’s most actively traded indices, causing notable movements in both the Nifty and the broader market as expiry approaches.
The Bank Nifty index tracks the performance of the banking sector, comprising major banks in India. The expiry of Bank Nifty derivatives contracts takes place every Wednesday of the week. If Thursday is a holiday, the expiry, like the Nifty, moves to the previous working day. Bank Nifty expiry day often brings higher volatility, especially in banking stocks and related sectors, as traders actively adjust their positions.
The Nifty Financial Services Index, or Finnifty, comprises companies from the financial services sector, such as banks, insurance, housing finance, and NBFCs. The Finnifty derivatives contracts expire every Tuesday of the week. Since financial services are a key part of the economy, the Finnifty expiry sees considerable trading volume, with traders adjusting their positions in anticipation of or reacting to market movements in the financial sector.
Unlike the weekly expiries of Nifty and Bank Nifty, certain indices like commodity indices or sectoral indices may have futures and options contracts expiring on Fridays. While not as common as Thursday expiries, these Friday expiries play a role in niche markets or less liquid derivatives. They can influence the behavior of sector-specific stocks or commodities and create localized volatility around these assets.
Expiry days are known for high volatility. Traders can take advantage of rapid price swings by using intraday strategies like scalping or range trading, aiming for small, quick profits.
These options strategies involve buying both call and put options (straddle) or options with different strike prices (strangle) to profit from large price movements in either direction. These are useful on expiry days when volatility spikes.
To avoid contract settlement, traders often square off their futures and options positions on the expiry day or roll them over to the next month’s contract to continue holding their exposure.
This strategy involves identifying the max pain point, the price at which most option holders lose money. Traders may expect the underlying stock or index to gravitate towards this level near expiry.
Traders may use delta-neutral strategies (e.g., iron condor or butterfly spread) to minimize the impact of price changes, focusing on capturing the premium decay as options lose time value near expiry.
Expiry days see increased volatility, leading to unpredictable price swings, which can result in significant losses if the market moves against your position.
For options traders, the rapid loss of time value (theta decay) as the expiry approaches can erode premiums, making it difficult to profit unless the market moves strongly in your favor.
As expiry nears, liquidity can dry up, especially in far-out contracts. This can lead to wider bid-ask spreads and challenges in executing trades at desired prices.
Fast-moving markets on expiry day can cause slippage, where traders execute trades at worse-than-expected prices, impacting profit margins.
Rolling over futures or options contracts to the next expiry involves additional costs, including transaction fees and potential price differences between contracts.
Expiry in stock market is vital for any trader, especially those dealing with derivative contracts. Expiry dates dictate when you need to make crucial trading decisions, and being aware of these can significantly impact your trading success. With the right strategies and risk management, you can navigate the complexities of expiry days and make the most out of your online trading experience.
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Written by Jainam Admin
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It becomes worthless unless exercised before expiry.
Yes, all derivative contracts have specified expiry dates.
They typically see increased trading volume and volatility, providing opportunities for traders.
Stay updated about market trends, set clear trading goals, and use stop-loss orders.
It can be safe if you have a solid strategy and risk management plan in place.
The stocks mentioned here are for informational purposes only and should not be considered recommendations. Please do your research and analyze stocks thoroughly before making any investment decisions. Jainam Broking Limited does not guarantee assured returns or future performance of any securities or instruments.
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