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- Show all articles
What is expiration time in options trading?
The expiration time refers to the exact date and time at which a contract is considered to be null and void. Derivative contracts are traded before their expiry by traders.
Expiry of Futures and Options
Indian stock market perspective: Options
In the Indian stock markets, trading in stock options contracts is available for a three-month period as per the exchange regulations.
Like the series of future contracts, the stock option contracts also replicate the same series of three successive calendar months and are classified into three categories – near-month, next month and far-month.
Also, there are two types of options: call and put. Both these options have monthly expiry, which is scheduled on the last Thursday of every month.
In the Indian stock markets, trading in index option contracts can be done on a monthly as well as weekly basis. For index, there are two types of options – call and put. This is similar to stock options.
Index options, which have a monthly expiry,expire on the last Thursday of every month. Like the series of future contracts, the index option contracts also replicate the same series of three successive calendar months and are classified into three categories – near-month, next month and far-month.
Index options having weekly expiry are scheduled to expire every Thursday for Nifty and Bank Nifty contracts. FINNIFTY weekly contracts expire every Tuesday. These contracts are termed as near-week contracts, next week contracts and far-week contracts.
How to square off options before expiry?
Options can be squared off before expiry by taking an opposite position to your pre-existing or open position. Which means if a trader has a long position, it is squared off by taking a short position in the same contract and vice-versa. Following that, a cash settlement will take place and your profit or loss will be calculated. Then either the money will either be credited to your trading account or will be debited from your trading account.
Options payoff at expiry
Options at expiry
|Short call||Long put||
|In-the-Money Options||Option value is the profit||Will forfeit the premium received and suffer a loss of the option value||Option value is profit.||Will forfeit the premium received and suffer a loss of the option value|
|At-the-Money Options||Option value is zero so the premium paid is the loss incurred.||Will receive the premium||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||Option value is zero so the premium paid is the loss incurred.||Will receive the premium as profit|
What happens if you don't sell options on expiry?
The system will auto square off your position on expiry unless you have opted for a physical settlement. The physical settlement is only possible for stock options.
What happens to options on expiry?
The system will auto square off all positions on options expiration unless a trader has opted for physical settlement. In case of physical settlement, the trader should either pay the full amount for the shares and receive delivery of the same, or deliver the shares depending on the position taken.
Contracts that are not squared by traders are cash settled automatically on the day of expiry.
If a trader identifies an opportunity in a particular contract, then he/she can take fresh positions in options or roll over futures contracts in the next month.
What happens when a call option expires In-the-Money(ITM)?
A call option buyer has the right to buy the underlying security but is not obligated to. When the call option expires ITM, it means that the spot price is trading higher than the strike price. So, the option holder shall choose to exercise the call option and buy the underlying security at the strike price which is lower than the market price. If the difference between the spot price and the strike price is greater than the premium paid, only then will it result in a net credit.
What happens when a put option expires In-the-Money?
A put option buyer has the right to sell the underlying but is not obligated to. When the put option expires ITM, it would mean the spot price is trading well below the strike price.Hence, the option holder will choose to exercise the put option and sell the underlying at the strike price, which is higher than the market price. If the difference between the spot price and the strike price is greater than the premium paid, only then will it result in a net credit.
Indian Stock Market Perspective: Futures
In the Indian stock markets, trading in futures contracts is available for three months, as per the exchange’s regulation.
Contracts are distinguished on the basis of expiry, namely:
- Near month: In the near or (current) month’s contract, there are 30 days or less left for expiry.
- Next month: In the next month's contract, there are 60 days or less left for expiry.
- Far month: In the far month’s contract, there are 90 days or less left for expiry.
For instance, let’s assume that it is 2 June 2022 today. So, an investor can trade Reliance Industries futures for the current month contract expiring on 30 June 2022; the next month contract expiring on 28 July 2022; the far month contract expiring on 25
Future contracts have only monthly expiry. Futures contracts for indices and stock are settled on the last Thursday of every month. If the expiry falls on a holiday, settlement is preponed to the previous day. All expiries are stipulated by exchanges.
How do you square off a futures contract?
Squaring off your position refers to taking an opposite position to your pre-existing. For instance, if you have bought, then you sell and if you have sold, then you buy. In this case, there will be a cash settlement, so your profit or loss will be calculated and accordingly money will be credited or debited.
What happens to futures on expiry?
At expiry, the price of a derivative contract converges with the spot price. Open positions are squared off and cash settlement takes place. This means if a trader makes a profit, the amount gets credited to his or her trading account. And if a trader incurs a loss, then the amount gets debited from his or her trading account the next day.
This is known as the ‘T plus 1’ settlement cycle.
If these positions are not squared off at expiry, and a trader opts for physical settlement, there is an exchange of delivery of shares for the full price.
a. Physical settlement: The underlying security on which the contract is based will be delivered by the seller of the contract and the buyer has to pay full price for it.
b. Cash settlement: The payoff is calculated and the profit or loss is credited or debited.