“EXPIRY” it is a term that you will not generally hear from the shareholders. Do you want to know why? This is because when you hold the shares, then their ownership never lapses (unless you decide to sell the shares).
So, why do the futures and options expire?
Unlike, buying the shares, getting the futures and options contract is mainly used for the short-term investment. When you take a decision to purchase a future or option contract, then you must agree to an expiry date.
What is an Expiry Date?
It is essentially a date on which the futures and options contract expire. On the day of expiry, a contract is settled between the buyer and seller. It is to be noted that expiry date of the contracts is considered to be the last working Thursday of the month. If there is a public holiday on Thursday, the contracts will be settled on the previous trading session.
What Exactly Happens on the Futures and Options Expiry Date?
If you hold a futures contract, then it has to be settled while you can also decide to cancel the options contract. All in all, in order to settle trade in the derivatives, then you can either cancel the contract or transact in cash.
For example, if you have got a futures contract to purchase 20 shares of a Company ABC, then on the day of expiry, you can settle the trade, by putting up a buying contract for selling 20 shares of the same Company ABC and settle the trade by paying the different amount for the two contract. It is important to note that the difference amount that has to be settled must be in accordance with the share's closing price on the last day.
Important Point to Remember: The contract that are not settled gets expired automatically. In case of the futures, the settlement have to be paid or received in cash.
How Stock Market is Affected by the Futures and Options Expiry?
The value of a contract is generally based upon the price of the share in the cash market. If there is a positive sentiment in the stock market, the demand for the buy contract increases when compared with the sell contracts. If the trend in the derivative market is seen, then the…
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