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
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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.
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.
FAQs
It is the last Thursday of every month. For example, if you buy a futures contract on the 14th of January 2022, the expiry date of the contract would be the 27th of January 2022, the last Thursday of the month.
How does futures and options work in India? ›
A future is a contract to buy or sell an underlying stock or other assets at a pre-determined price on a specific date. On the other hand, options contract gives an opportunity to the investor the right but not the obligation to buy or sell the assets at a specific price on a specific date, known as the expiry date.
What is the expiry date of futures contract in Indian stock market? ›
The last Thursday of each month is the standard expiration date for F&O contracts. However, the date is different for the BSE's sensex and Bankex F&O contracts. They expire on the last Friday of each month.
How are futures contracts settled in India? ›
Here, the difference between the futures contract price and the winning market price on the expiration date of the contract is settled in cash. For example, if a trader sells a futures contract at Rs. 100 and the market price on the expiry date is Rs. 90, the trader will receive Rs.
What happens in monthly expiry? ›
An expiry date in this context is a pre-determined date when the contract concludes. The standard expiration date for F&O contracts is the last Thursday of each month. These contracts are agreements to buy or sell an underlying asset at a pre-set price on or before a specified date.
How do you trade on monthly expiry? ›
How Option Expiry Day Trading Works? The buyer of a call or put option must purchase or sell the underlying asset by a specific date at the strike price. The last day of the futures and options (F&O) contract is known as the “expiry day". The last Thursday of the month is the expiry day for monthly options contracts.
How do futures and options work with an example? ›
Now that we have explored the meaning of futures and options, let's illustrate with a future and option trading example: Two traders agree on a ₹150 per bushel price for a corn futures contract. If the corn price rises to ₹200, the buyer gains ₹50 per bushel, while the seller misses out on a better opportunity.
Which is more profitable futures or options in India? ›
The choice between futures and options depends on your investment goals and risk tolerance – Both instruments can be used for hedging, but options offer more flexibility and limited risk. Futures offer higher potential profits but also higher risk, while options provide limited profit potential with capped losses.
How is tax calculated on futures and options in India? ›
If you are trading in Futures and Options, you should get your accounts audited if your turnover is more than ₹10 crore. You can also apply a presumptive taxation scheme if your turnover does not exceed ₹2 crore and declare that your taxable income is at 6% of the total Futures and Options turnover.
What is the process of futures expiry? ›
All futures contracts have a specified date on which they expire. Prior to the expiration date, traders have a number of options to either close out or extend their open positions without holding the trade to expiration, but some traders will choose to hold the contract and go to settlement.
Normally, the spread turns to zero on expiry day. Sometimes, due to volatility in the markets, the spreads turn negative. This results in a windfall for the trader, and they prefer to unwind the entire position and book the profit rather than just roll the futures position.
What happens if we don't sell futures on expiry? ›
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.
How options are settled on expiry date in India? ›
How the options contracts are settled in India? In India, options contracts are settled by cash. If you have open buy positions at in-the-money (ITM) strikes, they will be automatically exercised on the expiration day.
Can I exit futures before expiry? ›
Yes, among the many unique features of a futures contract, it allows you to trade (sell) a futures contract before expiry. In fact, most traders enter the market as speculators to profit from futures trading, exit their position before expiry. However, to trade in futures, you need a futures trading strategy.
How are futures settled daily? ›
Daily Settlement
The increase in the value of the transaction will be added to your account by the end of the trading day. And the same amount of money is deducted from the account of the person who has made a loss from selling this futures contract.
What happens when futures options expire? ›
Upon expiration, in the money Quarterly options will deliver the respective underlying futures contract, which immediately settles to the cash value of the SOQ. A trader would no longer have exposure to the market because both the options and futures contracts expire on the same day.
What is end of month option futures? ›
EOM options are designed to expire on the last business day of each calendar month, offering alignment with month-end accounting cycles.
What is the difference between weekly and monthly expiry options? ›
Weekly expiry option contracts expire every week on expiry day, and premium is smaller compared to monthly option for the same strike prices . But for monthly expiry the premium decay is much slower but liquidity will be less.
What happens if I don't exit the option on expiry? ›
If you don't sell your options before expiration, there will be an automatic exercise if the option is IN THE MONEY. If the option is OUT OF THE MONEY, the option will be worthless, so you wouldn't exercise them in any event.
