How Does the Monthly Expiry of Futures and Options Work in India?
Futures and options (F&O) are the stock derivatives traded in the derivatives market. A future is a contract wherein you can buy or sell an underlying asset at a specific date and price in the future.
On the other hand, in Options contracts, a trader has the right to buy or sell an underlying asset but has no obligation to do so.
It can be inferred that while trading in futures, the trader is obligated to square off their position at the specified date, but with options trading, there is no such obligation.
Consequently, the trader has the liberty of not fulfilling the promise of buying or selling the said asset before or on the date of expiration of the contract.
But what is this expiration date that traders must know about when trading in the derivatives market? Let’s dive deep into this and understand better.
How do futures and options contracts work?
The trading in futures and options is very different from trading in stocks. Trading in futures contracts means agreeing to buy or sell an underlying asset at a price that has already been decided, at a date in future that has also been decided. Underlying assets here refers to stocks, commodities, currencies, securities, indices, etc.
For example, the underlying asset can be an index like Bank Nifty or a commodity like nickel. With a futures contract, you will have to mandatorily make the purchase (buy or sell) before the contract’s expiration and meet your obligation.
For options, you can trade at the pre-decided price of the underlying asset until the contract expires. Regardless of the expiration deadline of the options contract, a trader can choose to not participate in the trade. However, this is a luxury that options traders enjoy at a premium that they have to pay in advance. As an options trader, you have the liberty to choose to buy/sell or not buy/not sell if you feel the deal is not profitable for you.
Read How to Trade in Futures and Options if you are a beginner
Companies | Type | Bidding Dates | |
| Regular | Closes 25 Apr | ||
| Regular | - | ||
| Regular | - | ||
| Regular | - | ||
| Regular | - |
What is expiration in F&O contracts?
As the name suggests, the expiry date in the market refers to the day on which a derivative contract- futures or options- expires.
Every F&O contract has an expiry date. Bear in mind that this is the expiration date of the derivatives contract and not of the asset or the security.
The validity of the derivatives contract ends on the contract’s expiration date. Thus, it is important to settle the contract before the expiry date. This settlement can be done in two ways:
- Cash settlement: It is a way of settling derivatives contracts using money or cash instead of using the asset.
- Physical delivery: The trader buys the underlying asset to settle the shortfall in the contract. This is most common in commodities contracts.
Futures contracts need to be settled before the expiration date to avoid penalties.
However, there is no penalty on not settling an options contract before the expiration. You can simply let the contract expire if you wish not to buy or sell the asset.
What is the expiry date for F&O contracts?
To avoid any confusion, the last Thursday of each month is the expiry date of the F&O contracts. For example, if you buy a futures lot on March 2, the contract will expire on the last Thursday of March. This falls on March 31, 2022. In case Thursday happens to be a holiday, then the last Wednesday of the month is the expiry day.
The last day of trading concept is exclusive to F&O contracts and is not used in equity trading. It is the last day that F&O traders can try and make profits from the contracts they hold.
Thus, you might have also noticed heightened volatility in the overall market on the last Thursday of each month.
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Note - NSE has decided to shift Nifty Bank F&O Expiry to Friday from Thursday NSE has set forth that it is changing the F&O expiry of Nifty Bank from Thursday to Friday. This will be effective from July 14, 2023. As per the new rule, the weekly expiry of Nifty Bank contracts will take place every Friday. In case there is a trading holiday on Friday, then the previous trading day will tend to become the expiry day. NSE has reduced the market lot size for Nifty Bank F&O to 15 from 25. This latest rule will be applicable from the commencement of July 2023 contracts. NSE has reduced the market lot size for Nifty Bank F&O to 15 from 25. This latest rule will be applicable from the commencement of July 2023 contracts. |
Takeaway
It is important to know that all F&O contracts will expire on the last Thursday of each month. This is a deadline that all traders need to be aware of to avoid fines; particularly if they are trading in futures contracts. The expiry date of derivatives contracts is also an important factor to keep in mind. It helps drive the market’s mood in the coming month/week.
Based on the nature of the settled derivatives contract, the market may turn bullish or bearish. The expiry date is also heavily monitored by arbitrage traders who may turn to the F&O markets to increase their profitability.