A trader opens his account one morning and finds his Nifty futures position missing. Another receives a margin call for the physical delivery of shares worth lakhs. Both missed the same thing: the expiry date. Derivatives contracts don’t last forever. They come with an end date that most beginners overlook until it’s too late.
In this blog, we address this pain point, explaining what is expiry in the share market, how it affects your positions, and what actions you need to take before contracts reach their final trading day.
Understanding Expiry in Stock Market Contracts
In the stock market, futures and options contracts have a fixed lifespan. Each contract comes with a fixed end date, known as expiry. This is the last day the contract is valid, after which it ceases to exist and must be settled or closed out. In India, most derivative contracts expire on pre-decided weekdays each month. On expiry, profits and losses are settled, and open positions are either squared off or carried forward into new contracts.
- National Stock Exchange (NSE): Nifty 50, Bank Nifty, and all other stock derivatives expire on the last Tuesday of the month now.
- Bombay Stock Exchange (BSE): Benchmark contracts expire on Thursday.
- Holiday rule: If expiry date is falling on holiday, it is moved to the last trading day before the holiday.
How Expiry Affects Options and Futures Trading
The approaching expiry date changes how contracts behave and impacts their value. For options, this means the time value gradually reduces, often quickly in the final days, a process known as time decay. Main impacts of expiry can be seen in F&O trading in following areas:
- Options settlement: If an option isn’t exercised or sold before expiry, what happens depends on its value. Out-of-the-money options, where the strike price is less favorable than the market, expire worthless in total loss of the premium paid. Whereas, the in-the-money options are handled based on the asset class:
- Stock options: These are now strictly physically settled. you don’t have the cash/shares, your broker may force-close the position in the final hour of trading to avoid default.
- Index options: These remain cash settled, where the profit is credited to your account balance.
- Commodity options: ITM commodity options (like crude oil or gold) devolve into a future contract rather than cash, requiring higher margins.
- Futures obligations: Futures are binding agreements. Any open position on expiry must be settled. In most equity and commodity markets, this is done in cash, though physical delivery may apply in some cases.
- Rollover activity: Traders who want to maintain their positions often roll them over. This means closing the expiring contract and opening a similar one in the next series.
For example, suppose you bought a Reliance Industries futures contract at ₹1,000 per share for a lot size of 100 shares. If the market price on expiry is ₹1,050, your account gets credited ₹5,000 (₹50 × 100). But if you hold a call option with a ₹1,100 strike price while the market stays at ₹1,050, the option expires worthless and the premium is lost.
Understanding how expiry works in these contracts is important, especially because both options and futures are part of the broader derivatives trading, which we’ll discuss next.
The Role of Expiry in Derivatives Markets
The expiry date in the derivatives market is the day a contract becomes void and must be settled. The main effects of expiry are as follows:
- Settlement schedule: Each contract has a fixed timeline. Expiry marks the last opportunity for traders to close positions or exercise options before automatic settlement occurs.
- Price discovery and variations: As expiry nears, more participants adjust their positions, which can cause noticeable swings in the underlying stocks or indexes. This often creates sudden bursts of volatility in both derivatives and cash markets.
- Liquidity changes: In the final week, trading usually moves from the expiring contract to the next month’s contract. This can change bid-ask spreads and make it slightly harder to execute trades in the near-term contract.
- Market patterns: Institutional investors and retail traders often roll over positions, which can influence price movements and create temporary imbalances in supply and demand.
How Expiry Date Impacts Stock Market Prices?
Expiry does not just affect derivatives; it can influence stock prices too. Heavy trading in the final week can cause short-term fluctuation contracts that may seem disconnected from a company’s actual performance. Some common effects include:
- The reversal effect: Stocks often experience abnormal volatility on expiration day. Interestingly, any sharp price move seen on the expiry date often reverses the very next day, displaying that the movement was driven by technical settlements rather than real news.
- Arbitrage pressure: Professional traders look for tiny gaps between the stock price and the futures price. To profit, they buy huge quantities in one market and sell in the other. This mass buying/selling near the closing bell creates significant price fluctuation in contracts.
- Price pinning: You might notice a stock sticking near a round number (like ₹500 or ₹1000) on expiry. This is called pinning, where the activity of option sellers keeps the price near a specific strike price to ensure the options they sold expire with the least amount of loss.
- Volume increase: The trading volume builds up a day prior to expiration and peaks during the final session. This intense activity can lead to price clusters, where the market moves in quick, jagged bursts as institutional players square off massive blocks of shares.
What Happens After Expiry Date?
Once expiry arrives, the contract stops existing. What follows depends on the type of settlement and the trader’s position at close.
Cash Settlement (Index derivatives)
Most index contracts like Nifty and Bank Nifty settle in cash. The exchange calculates the settlement price based on the average of closing prices in the final 30 minutes. If the position is in-the-money, profit gets credited to the trading account by the next session (T+1). Out-of-the-money positions expire worthless, premium paid is lost entirely.
Physical Delivery (Stock derivatives)
Stock futures and options now require physical delivery if held till expiry. A long call or long futures position means the trader must take delivery of actual shares. This needs full payment for the shares. Without sufficient funds, brokers levy penalties or auction the position. The obligation is binding, not optional.
Tax treatment after expiry
- F&O income is classified as non-speculative business income, not capital gains
- Profits get added to total income and taxed at applicable slab rates
- Losses can be set off against other business income, not salary income
- Losses can be carried forward for eight years if the return is filed by the due date
- STT on futures: 0.02% on the sell side
- STT on options: 0.1% on premium when sold
- Tax audit is mandatory if F&O turnover exceeds ₹10 crore, or under specific conditions related to presumptive tax if profits fall below 6% of turnover.
Transitioning via rollover contracts
Traders not ready to exit can roll over positions. This involves closing the expiring contract and opening a new one in the next month. The old position disappears, and the new position becomes active. Rollover avoids physical delivery but creates a taxable event for the closed leg. Prices between expiring and new contracts differ due to premium or discount, affecting the overall cost.
Key Strategies for Expiry in Share Market
Expiry days come with their own set of challenges, handled using the following methods:
- Straddle and strangle: These option strategies involve taking positions on both sides of the market, making them suitable when large price movement is expected around expiry.
- Squaring off or rolling over: Open futures and options positions are usually closed on expiry or shifted to the next month. Rolling over contracts helps continue exposure without going through settlement.
- Max pain theory: This strategy focuses on recognising the price level where the highest number of option positions expire at a loss, which prices sometimes move toward near expiry.
- Delta-neutral strategies: Approaches like iron condors or butterfly spreads are used to limit price risk and benefit from the reduction in option value as expiry approaches.
Conclusion
Now that we’ve covered what is expiry in share market, the key takeaway is simple: expiry isn’t optional, and it won’t adjust to your schedule. Mark these dates early. Plan your exits before the final trading hour. Decide if positions need squaring off or rolling over to the next month.
Traders who respect expiry timelines stay in control. Those who ignore them let the exchange decide their fate. That difference matters.
FAQ‘s
Expiry is simply the last day a futures or options contract is valid. After this, the contract either ends, is settled, or can be moved to the next series. It’s the day that decides how your profits or losses are handled.
As expiry gets closer, contracts start behaving differently. Options lose their extra time value, sometimes quickly in the last few days. Futures must be settled by the expiry day, either in cash or, rarely, through actual delivery. Some traders roll their contracts over to the next month to keep their positions going.
On expiry day, any open contracts are settled. Options that are profitable can be exercised or cashed out, while those that aren’t profitable expire worthless. Futures positions are either closed or settled in cash. If you don’t roll over, the contract just ends.
Expiry often shakes things up in the market. Stock prices can swing because of heavy trading in derivatives. Things like prices sticking near certain strike numbers, big volumes, and arbitrage between cash and futures can cause quick, short-term changes.
Yes, you can close your positions before expiry, roll them over to the next month, or use strategies like straddles, strangles, or delta-neutral setups. Planning ahead helps you avoid taking delivery of shares you don’t want and keeps taxes simpler.
It depends on the exchange. For the NSE, the last day is the last Tuesday of the month. For the BSE, it is the last Thursday.
