In the share market when trading options, you might have come across the word Expiry. But do you know what is expiry in the share market, and why is it so important for a trader to trade options?
In this article, we will be discussing the meaning and importance of different expiry in the share market.
What is Expiry in Options?
The expiry date refers to the date on which an options contract becomes null and void, meaning the holder can no longer exercise their right to buy or sell the underlying asset.
In India, options contracts have a predetermined expiration cycle. The National Stock Exchange of India (NSE) follows a quarterly, monthly, and weekly expiry cycle.
Here are different weekly expiries :
Different Expiry in Share Market | |
Index | Expiry Days |
FinNifty | Tuesday |
Midcap Nifty | Wednesday |
Nifty 50 | Thursday |
Bank Nifty, BSE Sensex, BSE Bankex | Friday |
What Happens on Weekly Expiry in Share Market?
The concept of expiry is important in options trading because it adds a time limit to the rights granted by the option contract. As the expiration date approaches, the value of the options contract may fluctuate significantly due to various factors such as the price movement of the underlying asset, market volatility, and time decay.
Options Strategies
Expiry gives a helping hand in selecting the appropriate strategy and managing risk effectively. Traders need to consider their investment objectives, option trading time horizon, and expectations for the underlying asset’s price movement within the options contract’s lifespan.
Rolling Over
To extend your options position beyond the current expiry date, you have the option to roll over the positions. Rolling over involves closing the existing options position before expiry and simultaneously opening a new position with a later expiry date. This strategy allows you to maintain their exposure to the underlying asset while managing the time decay
effect.
Theta Decay
Theta decay happens as soon as an option starts reaching expiry. When the expiration date approaches, the time value of the option contract decreases, which affects the overall value of your options contract.
DNE in Stock Options
DNE stands for Do not exercise. The NSE implemented this to allow traders to instruct the broker if they do not wish to exercise their right to buy or sell a stock.
After March 30, 2023, NSE discontinued DNE for futures and options resulting in brokers not being able to exercise options contracts on behalf of clients. But this facility will continue for index options.
Option Trading Expiry Time
As discussed above, different underlying assets have different expiries. Considering stock options, these contracts expire on last Thursday of every month at the closing time of the market.
In that case, if you have an open position in option that is most likely expiring out of the money then it is suggested to close the position before expiry time. Not doing so lead to physical delivery of stocks in your demat account and the debit of turnover value from your trading account, irrespective of your position as a buyer or seller
Index options, on the other hand, where the trade is settled in cash, the buyer can close position before expiry time in case the option expires out of the money to avoid any settlement consequences.
In case, the option expires in-the-money the buyer can opt to settle the trade and can earn profit equals to intrinsic value of the options.
Conclusion
Expiry determines the lifespan of an options contract, adding a time limit to the rights and potential profits associated with it. As the expiration date approaches, the value of the options contract can fluctuate significantly due to factors such as time decay, market volatility, and the price movement of the underlying asset.
We at Stock Patshala make you understand expiry and its implications, which can help traders develop effective strategies, manage risk, and make informed investment decisions.
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