Option expiration day in the Indian stock market is a crucial event for investors and traders. Understanding the basics of this day is essential for anyone involved in options trading. Here are some key points you should know about options expiration day in India:
Types of Options
In India, options come in two main varieties: index options and stock options.
- Index Options: These options are linked to popular indices like Nifty 50 and Bank Nifty. Index options are settled in cash, which means the difference between the strike price and the closing price of the underlying index on the expiry day determines the settlement amount.
- Stock Options: Stock options are tied to individual stocks. Unlike index options, stock options are physically settled, involving the delivery of the underlying stock at the strike price.
Understanding Options Contracts
Options, as derivative contracts, grant buyers the right (but not the obligation) to buy or sell a security at a predetermined price in the future. Buyers pay a premium to sellers for this privilege.
Managing Options Before Expiry
Options can be squared off before expiry by taking an opposite position to an open one. Cash settlement follows, determining profits or losses, with funds credited or debited accordingly.
Options Payoff at Expiry
Options’ value at expiry varies based on their status:
- In-the-money options yield profits.
- At-the-Money Options result in a loss equivalent to the premium paid.
- Out-of-the-money options yield premiums as profit.
Unsold Options on Expiry
Unsold options are auto-squared off by the system, except for physically settled stock options. Traders can identify opportunities in specific contracts to take fresh positions or roll over futures contracts into the next month.
Call and Put Options at Expiry
When a call option expires in-the-money, the option holder can buy the underlying security at a lower strike price, resulting in a net credit if the difference exceeds the premium paid. For put options expiring in-the-money, the option holder can sell the underlying at a higher strike price, similarly resulting in a net credit if the difference surpasses the premium paid.
Option Expiry Dates
Options in India have both monthly and weekly contracts. Monthly contracts expire on the last Thursday of the month. However, for Bank Nifty Futures and Options, the expiry day changed to Friday from Thursday starting July 14, 2023. Weekly contracts, on the other hand, expire every Thursday of the week.
In-the-Money, Out-of-the-Money, and At-the-Money Options
On option expiration day:
- In-the-Money (ITM) Options: These options are automatically exercised or settled. This means the buyer of the option must take or give delivery of the underlying asset at the strike price or receive/pay the cash difference.
- Out-of-the-Money (OTM) Options: OTM options expire worthless. In this case, the buyer of the option loses the entire premium paid, while the seller keeps the premium received.
- At-the-Money (ATM) Options: ATM options may be settled either in cash or physically, depending on the exchange rules and regulations.
Risks and Rewards
Trading options on expiry day can be both risky and rewarding, depending on various factors:
- Market Conditions: The market’s behavior on the expiry day greatly influences the outcome of option positions.
- Trader’s Strategy: A well-thought-out trading strategy is crucial for success. Traders should consider factors like intrinsic value, time value, implied volatility, liquidity, and transaction costs.
- Risk Management: It’s essential to assess your risk tolerance, trading objectives, and exit plan before entering or exiting an option position on expiry day.
Strategies for Success
Traders employ various strategies to capitalize on Options Expiry Day. For instance, they may sell a put option when they believe the market won’t dip below a certain level, or sell a call option when they anticipate the market won’t surpass a specific threshold. These strategic moves can lead to profitable outcomes.
Futures Contracts in Indian Markets
In the Indian stock market, futures contracts are accessible for three months, categorised as near month, next month, and far month, based on the time left for expiry.
Options Expiry Day is a critical juncture for Indian traders, offering opportunities and challenges alike. By comprehending the nuances of this event, traders can make informed decisions and enhance their chances of success in the dynamic world of options trading.
When a call option expires ITM, the option holder can buy the underlying security at the lower strike price, resulting in a net credit if the difference exceeds the premium paid.
When a put option expires ITM, the option holder can sell the underlying at the higher strike price, similarly resulting in a net credit if the difference surpasses the premium paid.
On options expiry day, in-the-money options are settled by taking or giving the underlying asset, out-of-the-money options expire worthless, and at-the-money options follow exchange rules for cash or physical settlement.
Options in India expire on the last Thursday of the month (monthly contracts) or every Thursday of the week (weekly contracts), depending on whether they are index or stock options.
Yes, you can buy an option on its expiry day, but it’s a high-risk move, as the option’s value is heavily influenced by its intrinsic value and can result in significant gains or losses based on underlying price movements.
Disclaimer: Investments in the securities market are subject to market risks; read all the related documents carefully before investing.