- All options contracts expire at a specific date. The expiration date matters, as the contracts are settled on or before this date.
- Based on this date, the special price and the premium amount are decided.
- In this article, we will learn in detail about options contracts and their expiry dates.
What is an Options Contract?
An options contract is a type of agreement between two parties. As per this agreement, the option holder has a right but not the obligation to buy or sell the underlying asset at a certain date in the future at a specific price. Whereas the writer of the contract has no choice but to buy or deliver the underlying asset whenever the option is exercised.
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There are two types of options contracts: call option and put option.
- Call Option:
The option holder gets the right but not the obligation to buy the security at the pre-determined strike price before the expiry date.
- Put Option:
The option holder gets the right but not the obligation to sell the security at the predetermined strike price before the expiry date.
What is the Expiration Date in the Options Contract?
- As mentioned earlier, options contracts come with an expiration (or expiry) date. All options contracts expire on or before a specific date, which is known as the expiration date in the options contract. All derivatives contracts have an expiration date, too.
- The expiration date of the options contract is determined on the basis of its underlying security. Options expiry in India refers to the contract and not the underlying security.
- The expiration date of the options contract is considered the last day for the option holder to make a decision. Either he may exercise the contract or let it expire.
- Different countries have different expiry days. As far as Indian stock markets are concerned, the expiry of the options contract takes place on the last Thursday of the month. When it comes to weekly options contracts, the expiry takes place at the end of business hours every Thursday.
- When there is a holiday on the day of expiry, the options contract expires a day before the original expiry date.
- In the USA, the expiry of the options contract takes place on the third Friday of the month.
Expiration and Settlement
The settlement takes place between the buyer and the seller at the expiry of the contract. This settlement happens in two ways:
- Physical delivery:
The seller of the contract delivers the underlying security in physical form to the buyer. The buyer, in return, pays the full amount.
- Cash settlement:
Under this system, the difference between the spot price and the derivative price is settled with money. At present, in India, equity derivatives are settled in cash.
How to Pick the Right Option Expiration Days?
There are two major tools that you can use to pick the right option for expiration days. They are as follows:
Many traders consider market volatility when they decide the expiry dates of the options contracts. They use implied volatility (IV) and historic volatility (HV) data to decide on the expiry date. IV determines future expectations concerning volatility, and a higher IV determines the higher option premium. HV determines past trading ranges and prices.
Mathematical calculations like 'Greeks' have been used by traders to scrutinize how variables like volatility and time till expiration affect the movement of option prices.
This article provides an idea of the expiry date of the options contract. So, if you plan to trade in an options contract, it is advisable to plan its expiry date carefully.