How Monthly Expiry of Futures and Options Affects Traders

In the derivatives segment of the Indian stock market, all futures and options (F&O) contracts come with an expiry date. The expiry day can bring increased volatility, rapid changes in pricing, and significant trading activity. For traders, knowing how expiry works is crucial for managing risk and executing profitable strategies.

Futures and options contracts are agreements to buy or sell an underlying asset at a future date. Each contract has a fixed validity, and when this period ends, it is said to "expire".

In India, monthly expiry refers to the last Thursday of every calendar month, when that month's F&O contracts are settled and cease to exist. If last Thursday is a trading holiday, the expiry shifts to the previous trading day.

Derivative contracts in India follow different expiry cycles based on the instrument types given below:

Weekly Expiry

Primarily applicable to index options like Nifty and Bank Nifty, weekly contracts expire every Thursday.

Monthly Expiry

Applicable to all futures contracts (stock and index) and stock options, monthly expiry occurs on the last Thursday of the month.

Quarterly and Longer-Term Expiry

Some indices and institutional trades also offer quarterly or long-dated contracts, though these are less popular among retail traders.

As expiry approaches, various pricing dynamics come into play, including the following effects:

Time Decay in Options

Options lose value as they approach expiry, especially out-of-the-money contracts. This phenomenon, called theta decay, accelerates in the final week before expiry.

• In-the-money options retain some value
  

• Out-of-the-money options may expire worthless
  

Futures Price Convergence

Futures prices gradually align with the spot price of the underlying asset as expiry nears. This process is called convergence, and it reduces the arbitrage opportunity.

Increased Volatility

Expiry day often sees higher trading volumes and sharp price swings, as traders unwind, square off, or roll over their positions.

Traders often adopt specific tactics to manage risk and optimise outcomes on expiry day, such as:

Rollover

Traders transfer their positions from the expiring contract to the next month’s contract. This is common in futures trading and helps maintain a continuous position.

Square-Off

Closing an existing position before expiry to avoid automatic settlement and associated charges or risks.

Option Selling

Many traders sell options close to expiry to capitalise on time decay, especially when the market is range-bound.

Futures and options are derivatives whose value is linked to an underlying asset such as stocks, indices, or commodities.

• Futures contracts are agreements to buy or sell the underlying asset at a predetermined price on a specific future date. Both buyer and seller are obligated to honor the contract, and prices fluctuate daily based on market movements.
  

• Options contracts give the buyer the right, but not the obligation, to buy (call option) or sell (put option) the underlying asset at a set price within a specified period. The seller of the option is obligated to fulfill the contract if the buyer chooses to exercise it.
  

In India, most stock and index F&O contracts expire on the last Thursday of each month, and positions are settled in cash if not squared off before expiry.

Expiry week can influence trading conditions for retail participants in several key ways:

Margin Requirements

As expiry approaches, brokers may tighten margin rules to reduce settlement risk. Traders should monitor available capital and margin alerts.

Slippage and Execution

Increased volatility can cause slippage between intended and actual trade prices. Using limit orders can help manage this risk.

Auto-Exercise of Options

If in-the-money options are not squared off, they may be automatically exercised by the exchange. This can lead to unexpected settlement obligations, especially for stock options with physical delivery.

Since October 2019, all stock futures and options in India are physically settled on expiry. This means:

• Futures: You must take/give delivery of shares unless squared off
  

• Options: Exercised in-the-money contracts lead to share settlement
  

Retail traders must be careful to square off or roll over positions to avoid unintended delivery.

Several tools can help traders stay informed and manage expiry-related decisions these include:

• Broker platforms: Display expiry calendars and rollover analytics
  

• NSE Website: Lists all active contracts and their expiry dates
  

Marketwatch Tools: Help monitor open interest, price movement, and volume on expiry days

Let’s say you hold a Nifty 50 call option at strike ₹22,000 expiring this month. If Nifty trades at ₹21,950 on expiry day and you do not square off:

• The option expires out-of-the-money
  

• It becomes worthless
  

• You incur a 100% premium loss
  

Now suppose Nifty ends at ₹22,100:

• The option is in-the-money
  

• It may be auto-exercised
  

You are liable to settle the difference or take delivery (if applicable)

Expiry day can pose unique challenges for traders, including risks such as:

• Sudden Price Swings
  

• Increased Liquidity Risk
  

• Higher Brokerage or Slippage
  

• Physical Settlement for Stocks

Planning in advance, monitoring positions, and using stop-loss or exit strategies can reduce these risks.

Monthly expiry is a critical event in the F&O calendar. For traders, understanding expiry dynamics can lead to better strategy execution and risk control. Whether you choose to roll over, square off, or write options, managing expiry requires preparation and discipline.

This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.