Are you willing to know the processes that take place on the date of expiry in the F&O market? If yes, you can get to know it right here in this post.
In general, the expiry date of a product means the date by which the product can be used. This is the most general understanding of the expiry date. However, in the field of stock trading, it refers to the termination or expiry of an asset or a contract. If your stocks are primarily related to the derivatives segment or future and options contracts, the expiry date means the last date of the agreement after which it would be no longer legally binding.
Though you may think what’s so special about this expiry date, there are several things that make it very important. The expiry date may signify different things not only for the stock traders but for the entire stock market too. Let’s get to know them in detail in the following part.
What do derivatives contracts mean?
Derivative contracts are signed between two or more parties and the value of the derivative is dependent on an underlying monetary asset or a group of assets.
These underlying assets may include:
· Stocks
· Bonds
· Interest rates
· Commodities
· Currencies
· Market indexes
Any kind of variation in the underlying asset ascertains the value of the derivative. The stock investors may choose to trade in derivatives on a stock exchange or over the counter (OTC).
OTC derivatives are more common due to their uncontrolled features. However, they tend to be riskier for the counter party. Derivatives that are traded on exchanges follow a standard pattern, hence, they carry a lesser risk.
In general, investors use derivatives to guarantee balanced exchange rates in the trading of foreign goods. This is because global traders ask for a reliable accounting ecosystem since regional currencies had such contradictory values.
A derivative isn't a particular type of security; rather, it's a group of security. Thus, they can be of different types. Considering the specific type, a derivative may boast varying functions and uses. For instance, specific types of derivatives are employed for hedging or insuring against the risk associated with an asset. Moreover, high leverage exemplifies several derivatives.
You may also like to read: Top demat account in India
What does the expiry date mean in the F&O market?
In order to avoid confusion or any kind of uncertainty, the Bombay Stock Exchange has allotted a standard expiry date in the F&O market. Generally, it is the last Thursday of every month.
However, for example, if there is a trading holiday on the last Thursday, the previous day would be considered as the expiry date of the derivative contract.
What are the procedures for the expiry date?
Below are the things that happen on the expiry date of the derivative contracts.
Options Contracts
If there are options contracts, there is no need to fulfill the contract. Considering this, if no action is taken on the contract, it just expires automatically. According to one of the best trading app, the premium that is paid to buy the option is lost to the seller. There is no obligation to pay any additional charges.
Futures Contracts
On the contrary, one needs to fulfill the contract on the expiry date in the case of futures contract. There are two paths to perform this.
· You can choose to buy another contract that negates the worth of your existing contract. For example, if you bought a futures contract to buy 1000 shares of ABC company. On its expiry date, you can invest in another futures contract to vend 1000 shares of the same company. However, you may need to settle the difference in price, if there is any. This fresh contract invalidates the previous contract to sell the shares. The motive for the price difference refers to the price change of the futures contract. As the share prices vary regularly, the price of the futures contract also varies given the stock price changes.
· You can choose the settlement by paying the cash for the contract. For example, if you have bought a futures contract to buy 1000 shares of ABC firm. You would need to pay the required amount to terminate the futures contract on the expiry date. You would be required to buy the quantified shares and pay the applicable amount.
How does the stock price gets affected by the expiry date?
As the expiry date refers to the closure of F&O contracts, you can see a high level of instability in the stock exchange. Given the nature of the derivatives contracts, the market may go bullish or bearish.
Furthermore, arbitrage trading is also found to influence the stock market prices on its expiry date. Arbitrage trading refers to when F & O traders measure the overall performance of the fundamental assets of the contracts before the expiry date. F & O Traders also trade on the secondary markets for optimum effectiveness. They may get it from the secondary market and sell on the F & O market conversely. This buying and selling leads to price variations and affects the overall stock market. This influence, however, is short-lived as the stock market modifies itself once the expiry date is passed. If you want to play with this variation, make sure to choose the best broker for trading to get the benefits.
The Conclusion
The expiry date fixes the settlement of derivatives contracts and one must need to know what happens on that date. Whether you are a new stock trader or have been doing it for years, it is always advantageous to know about the expiry date and its impact on the stock price and the stock market. This short-term volatility can be used to gain profits or avoid losses.
Comments