It’s Expiry day! 3 Things you Need to Know
Being the last Thursday of the month, today is the “expiry” day for the stock markets.
In theory, the price behavior should be no different for stock prices on an expiry day versus non-expiry days, since only Futures and Options expire on the day (all November 2014 Futures and Options). However, the reality is that the spot price does indeed get affected.
Keep these 3 points in mind as you go through the trading day.
- Turnover on the exchange is greatly higher on expiry days versus any other trading day. Keeping this in mind, liquidity is usually higher, resulting in better fill prices. Take advantage of this by placing limit buy orders at lower prices than you usually would. Instead of simply placing the order at the ask, you can look at the LTP (last traded price) and attempt to get filled at that rate if the LTP is lower than the ask. The opposite applies to sell orders.
- Arbitrageurs participate actively throughout the day, as the spot price for the underlying ends up matching the futures price at market close. Knowing this fact, you can also play the arbitrage game. If you see a large spread between a stock and its corresponding Future, try to grab a good rate on the futures leg only and square it off quickly when it collapses with the cash price. There is heavy competition to grab both legs at the same time (Cash Futures Arbitrage), so attempting to grab both legs at your desired rates, at the same time, is difficult. By only focusing on the Futures leg, you can look to buy and sell quickly and make a quick profit. The lower STT on the Futures leg for sell orders (0.01%) versus cash (0.025%) also helps.
- Don’t be afraid to play the volatility game. It is well known that volatility is greatly higher on an expiry day; keeping this is mind, large sudden moves happen frequently on actively traded stocks and Nifty Futures and Options. Therefore, if you are holding on to a position with no intention of keeping it long term, look to square it off sooner rather than later. If you are an intraday trader, take advantage of these quick up and down moves by using limit orders and exiting positions quickly.
Expiry day can be intimidating for novices, but can be the best trading day of the month for an experienced day trader. Take advantage of the increased volatility and liquidity by making swift, quick but informed trading decisions.