Understanding What Is Expiry Date In Indian Stock Market: Derivatives contracts are financial instruments in the stock market that are used by individuals for the purpose of hedging and also for the purpose of increasing their wealth.
But unlike shares, that does not have an expiry date, these derivatives contracts have an expiration date upon which they have to be exercised. In this article, we will the discussing what is expiry date in the Indian Stock Market.
What Is A Derivative Contract?
Before discussing what is expiry date in Indian stock market, let us first understand the meaning of Derivative contracts.
A derivative contract is a financial instrument whose value is derived based on the price of the underlying asset. The underlying asset can be stocks, commodities, currencies, etc.
This contract is entered between two parties (i.e: the buyer and the seller) to be traded at a specified rate on or before the expiry. This derivative contract can further be segregated into futures and options contracts in the stock market.
A futures contract is a type of derivative contract that is entered between the buyer and the seller which has to be compulsorily executed by the parties on the date of expiry irrespective of whether they are earning a profit or incurring a loss
An options contract is a type of derivate contract that is similar to a futures contract. But here, the buyer of the options contract has the choice of not executing the contract upon the date of expiry.
For this choice of execution, the buyer of the options contract will pay a premium to the seller. The seller of the options contract on the other hand will compulsorily have to execute the options contract upon the choice of the buyer.
For this, the seller will receive a premium from the buyer.
What Is Expiry Date In Indian Stock Market?
The expiry date is the date on which the buyers and sellers have to execute the derivate contract irrespective of whether they earning a profit or incurring a loss.
To remove the confusion about the expiration dates of the derivative contracts, the Indian stock exchange has set a fixed expiry date upon which the F&O contracts have to be executed.
In the case of F&O contracts based on stocks, the expiry date will be on the last Thursday of every month. If there’s a holiday on the last Thursday of the month, the expiry date will be pushed to the previous date.
In the case of F&O contracts based on the index, the expiry date will be set on the Thursday of every week. If there’s a holiday on the Thursday of the week, the expiry date will be pushed to the previous date.
Index options also have Weekly expiry and expire on every trading Thursday of the week.
What Happens To The F&O Contacts On The Expiry Date?
Here’s what happens to the futures and options contract on the date of the expiry:
- Options Contracts
In case you are the buyer of the options contract, you have the choice of executing or not executing the contract. As such, if the buyer does not execute the options contract, it ceases to exist. The premium that is paid to the seller will be the loss incurred by the buyer.
In the case of the option sellers, if the buyer is benefiting from the contract on the day of expiry, the sellers will have to pay the profits earned by the buyers.
If the options contract is in the favor of the sellers on the day of expiry, the seller keeps the premium received as profits because the buyer will not execute the contract.
- Futures Contracts
In the case of futures contracts, the contract holders will have to fulfill the contracts in one of the following ways:
The contract holders can settle the contract through cash. The buyer would be paying the cash specified in the contract and the seller would receive it.
If the price of the underlying is more than the specified price in the contract, the buyer will be profitable, and if the price of the underlying is less than the specified price in the contract, the seller will benefit during the execution of the contract.
If the buyer or seller of the futures contract wishes to hold on to the contract after expiry, then they could carry forward the contract to the next expiry.
Effect Of The Expiry Date On The Stock Price
As the expiry date marks the closure of F&O contracts, there will be a considerable amount of volatility in the market. The markets might turn bullish or bearish depending on the nature of the derivatives contracts on the day of expiry.
What is weekly expiry in Indian stock market?
Weekly expiry in the Indian stock market refers to the expiration of weekly index and stock options contracts, which allow traders to buy or sell specific stock options or index options at a predetermined price on a specific date in the future. These contracts can be used for speculation or risk management purposes and expire on Thursdays at the close of the market. It’s important to understand the risks and potential rewards associated with these instruments before trading them.
In this article, we discussed what is expiry date in Indian Stock Market and what happens to the F&O contacts on the Expiry Date, and the effects of the expiry date on the stock price.
Like all other investment instruments, investing in derivatives necessitates you have a thorough understanding of the market, Knowing the expiry date of the derivatives contract helps know what happens on that date and moreover helps you take important decisions regarding it.
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