What is derivative Expiry Date?
The Derivative Expiry Date in trading, refers to the date in which options or futures contracts expire. In other words, the expiration date is the last day that a derivative contract is valid. On or before this day, investors will have already decided what to do with their expiring position. Every derivative contract, which is based on an underlying security such as a stock, commodity, or a currency, has an expiry date, though the underlying security usually does not have any expiry date.
A derivative contract which is based on underlying security exists only for a specified period, which ends on its expiry date.
On the expiry day, the contracts are settled between the buyer and seller. It can be carried out in two ways, either you can buy another contract which nullifies your current contract, or you can settle in cash. In Indian stock exchanges, the expiry date is the last working Thursday of the month when the contract expires.
For example, suppose you buy a futures contract which allows you to buy 200 shares of XYZ Company, then to close the contract, you can buy another futures contract which allows you to sell 200 shares. The difference in the price of the contract is the money you have to pay for that. Each contract is traded at a specific value.
Why is it the most important day?
When an investor buys a derivatives contract, they monitor the movement of the underlying asset from the stock markets and various other factors like open interest, future price movement, etc. Based on the observations, they take a call on when to settle the contracts. This can be done any time before expiry.
The settlement is the fulfilment of a derivatives contract agreement. The value at which each contract is settled is called a settlement value. This value often depends on the closing price of the underlying asset. The asset could be a stock, index, commodity or currency. The settlement value of each contract is tied to the closing price of the stock on the last day.
Contracts that are not settled by traders voluntarily expire automatically on expiry day. In the case of futures and in-the-money options contract, the trader has to pay or receive the settlement value in cash while out-of-the-money options contracts become null and void.
Coming back to the movie analogy, like sequels, in case traders see potential in a particular contract, they can take fresh positions in options or roll over futures contracts in the next series. This is usually decided on expiry day basis the rollover data from the previous month.