Expiry of futures & options: How does it work

Introduction

Did you know that the last Thursday of every month can be one of the most crucial days in the stock market? That’s because of the F&O expiry. As these contracts end, they can cause sudden and significant price movements. For new investors, understanding the concept of F&O expiry is vital. This article will explain what happens on these critical dates and how to prepare.

How Do Futures And Options Contracts Work?

Futures and options are financial derivatives, meaning their value is derived from an underlying asset, such as stocks, commodities, or indices.

1. Futures contracts

A futures contract is an agreement to buy or sell an asset at a predetermined price on a specific future date. These contracts are binding and must be executed on the expiry date unless they are closed out before that.

2. Options contracts

Options give the holder the right, but not the obligation, to buy or sell the underlying asset at a set price before or on the expiry date. There are two types of options:

(i). Call options: Give the holder the right to buy the asset.

(ii). Put options: Give the holder the right to sell the asset.

Investing in futures and options allows people to speculate on future price changes of assets without actually owning them. It’s like making a bet on whether the price will go up or down. In essence, these financial tools offer flexibility and opportunities for investors to profit from price movements without purchasing the underlying assets directly.

What Is Expiration In Future And Option Contracts?

Expiration in futures and options contracts refers to the specific date on which the contract ends and must be settled. Let's break it down.

Futures Contracts

In futures contracts, the expiration date is when the agreement between the buyer and the seller concludes. By this date, two things can happen:

1. Execution

The buyer and the seller complete the transaction as per the contract terms. For example, if the futures contract is for a commodity like oil, the buyer takes delivery of the oil, and the seller provides it.

2. Closing out

Traders often choose to close out their positions before the expiration date. This means they take an opposite position in the market to nullify the contract. If they had agreed to buy, they would now sell the same quantity, and vice versa.

Options Contracts

In options contracts, the holders must make a critical decision on the expiration date:

1. Exercise the option

If the option is favourable (e.g., the market price is better than the strike price), the holders can exercise the option. This means they will buy or sell the underlying asset at the agreed-upon price (strike price).

2. Let it expire

If the option is not favourable (e.g., the market price is worse than the strike price), the holder can let the option expire worthless. This means they choose not to exercise the option and simply let the contract lapse.

Expiry Date For F&O Contracts

The expiry date is critical in F&O trading as it dictates the timeline for executing or settling contracts. In India, stock and index futures and options typically expire on the last Thursday of the contract month. If this Thursday is a holiday, the expiry will be moved to the previous trading day. 

For example, if you hold a futures contract that expires in July, you must either execute the contract or close your position on the last Thursday of July.

When is the NIFTY 50 Expiry Date?

The NIFTY 50, India’s benchmark stock market index, follows the same expiry rules as other Futures and Options (F&O) contracts. Consequently, the NIFTY 50 expiry date is also the last Thursday of each month. This day is crucial for traders and investors as it often sees increased volatility and trading volumes.

Other key indices, however, such as the BANK NIFTY and NIFTY Midcap, adhere to a different expiry schedule. Here are a few notable examples:

1. BANK NIFTY

The NIFTY Bank index, which includes Indian banking stocks. Expires on the last Wednesday of the month. If it's a holiday, the expiry is on the previous trading day.

2. NIFTY NEXT 50

Comprising the 50 companies from NIFTY 100 after excluding the NIFTY 50 companies, this index expires on the last Friday of the month. If it's a holiday, the expiry is on the previous trading day.

3. NIFTY FINANCIAL SERVICES

This index includes the top financial services companies and expires on the last Tuesday of the month. If it's a holiday, the expiry is on the previous trading day.

4. NIFTY MIDCAP SELECT INDEX

This index consists of mid-sized companies with good liquidity and performance on the NSE. Expires on the last Monday of the month. If it's a holiday, the expiry is on the previous trading day.