How to Trade on Expiry Day?

Future and Options contracts in India are traded on the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE). Each future and option contract comes with an expiry i.e. the day on which the traders settle their trade. But how to trade on expiry day and how to square off the position?

In this article, we will be discussing different aspects need to be considered to trade on the expiry day and what things to be considered by the traders already in the open position.

Can We Sell Option on Expiry?

SEBI has implemented specific rules regarding the trading of options on the expiry date, and according to SEBI regulations, options trading on the expiry date follows a process called “European-style exercise.”

This means that options can only be exercised on the expiry date itself, unlike in some other markets where options can be exercised at any time before the expiration date. Therefore, as an option seller, you cannot sell options on their expiration date in India.

An option seller must fulfill their contractual obligations if the option buyer decides to exercise their right. If you have sold an options contract and it is in the money, the buyer has the right to exercise the option on the expiry date.

In such a scenario, the seller is obligated to buy or sell the underlying asset at the agreed-upon price (strike price) as per the terms of the options contract.

To exit a position in options trading, including selling an options contract before the expiry date, traders can employ a strategy known as closing the position.

This involves executing a trade that effectively offsets the existing options position. Traders can choose to buy back the options they sold, thereby closing their position and eliminating any further obligations associated with the contract.

Don’t forget that options are complex and involve risks. Prices of option contracts can fluctuate, and if not properly understood, traders may incur significant losses. Keep in mind that you can choose your option trading expiry time  from weekly to quarterly expiration. 

To participate in options trading in India, individuals must have a Demat account, a trading account, and the necessary approvals from their broker. It is crucial to choose a reputable broker that offers a user-friendly trading platform, reliable customer support, and access to comprehensive market research and analysis.

In conclusion, while options trading provides ample opportunities for profit, selling options on the expiry date in India is not permitted. SEBI regulations dictate that options can only be exercised on the expiry date itself, following a European-style exercise process. As an option seller, you must fulfil your contractual obligations if the option buyer decides to exercise their right. Understanding the rules and regulations, as well as employing proper risk management techniques, is crucial for navigating the options market successfully.

What Happens If I Don’t Square Off Options On Expiry?

The good thing about options is that they don’t force you to fulfil the contract. Therefore, if no action is taken on the contract before the expiration date, it simply ends.

‘Do Not Excercise’ facility

DNE is an abbreviation for Do Not Exercise. By implementing this, the NSE gave traders the option to instruct the broker whether or not they want to exercise their right to buy or sell a stock.

Brokers will not be able to exercise options contracts on behalf of clients after March 30, 2023, when NSE discontinued DNE for futures and options. For index options, however, this facility will remain.

In conclusion, options trading includes multiple rules and regulations, and a trader must be aware of all of them before trading. So, people thinking option trading gambling and entering into the trade without complete knowledge and skills can ultimately lose their capital.

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