Why the New Option Expiry Rules are Important

Summary

With a shift of the weekly expiry of Nifty Bank (weekly options contract) to Wednesday, the repercussions will be manifold. With a separate expiry on each day, investors and traders will need to realign their strategies and resources to the new expiry days to execute, as well as maximise returns from trades.

What the new rules say

In July 2023, the National Stock Exchange (NSE) announced that options contracts for the Nifty Bank would expire on Wednesdays. This implied that they would no longer expire on the same trading day.

With effect from September 6, 2023, the options contracts will expire on Wednesday, and not on Thursday, as they used to formerly. However, this is applicable only to the weekly contract options. Options contracts of the widely traded bank index which are on a monthly and quarterly basis will continue to expire on the last Thursday of the month in which they are to expire.

If Wednesday is a public holiday, the previous day will be the expiry day. In effect, the first three expiration dates for September will be on Wednesdays, and the last one will be on Thursdays.

In the same light, the expiry of MIDCPNIFTY option contract’s expiry has been shifted to Monday from Wednesday, and is applicable for futures and options for weekly, as well as monthly options.

All of this may seem a bit daunting at first, but the explanation given below will put things into perspective and show how things are likely to shape up for the average investor.

Why is this change important?

The change in the expiry date is important because of a number of reasons. While some may be immediate, others may take effect in the long run:

1. Change in strategies: With the expiry date having been changed, traders and investors will need to change their strategies as to how they decide to close their contracts. The decision to roll up, roll down or roll forward will change because movements in Nifty Bank would have an impact on NIFTY as well because the banking index accounts for the highest weight.
2. Reduced volatility: The closure of Nifty Bank option contracts earlier meant that there was significant volatility in the market on Thursdays. However, with expiries taking place on Wednesdays, overall market volatility will be less on Thursdays, along with an additional day on Friday for things to smoothen out. With most trading activities for Nifty Bank taking place on Wednesday, volatility will be much less on Thursdays and Fridays. However, there will be apprehensions initially regarding how the dynamics of the new expiry days will come into play.
3. Use of extra resources: The convenience of closure and expiry of contracts on the same days was that they could be taken care of simultaneously. However, with different expiry days, more resources will have to be deployed to not just take care of the formalities of expiries but to also ensure that the desired and adequate returns are achieved.
4. Increase in trading volumes: Trading volumes rise significantly on the days that options contracts expire. With separate expiry dates for the trade indices, the volume of trading will also rise in the days to come.
5. More time to formulate strategies: With the expiry of the Nifty Bank on Wednesdays, analysts and investors will get an extra day to plan their exit strategies for the Nifty index.
6. Concentrate on specific exits: Previously, traders and investors had to allocate their time and resources to strategise and implement their exits. But with the separation of expiry dates, they will now be able to concentrate on one index per day. This will help them to ensure efficiency and get returns that are in line with the investment goals.

How this panned out:

Initially, the expiry date was shifted to Friday by the NSE. But this was soon changed, and Wednesday was chosen to be the date for the expiry of weekly options contracts. Here’s what the revised timetable looks like for the expiry of indices.

With the relaunch of the BSE's relaunched Sensex and Bankex F&O, traders will now effectively have five expiries in a week.

Summing up:

It is essential to note that even though the expiry dates may change from one day to another, their sensitivity to other factors such as price volatility, market fluctuations, risk management, trading volumes, economic events, geopolitical factors and overall investor sentiment. In fact, investors and traders often monitor the expiries of options to see how they will need to adjust their strategies, both in the short and long run. With the help of this blog, things should be easier for you.