By: ABP News Bureau | Updated at : 01 Jul 2024 03:07 PM (IST)
Every F&O contract has an expiration date, which is the date the contract ceases to be valid. It's essential to settle the contract before this date. ( Image Source : PTI )
Futures and options (F&Os) are crucial components of the derivatives market, offering distinct ways to trade stock derivatives. The day of the month when futures and options expire, is typically the last Thursday of every month. This is the date after which contracts are invalid. Here's a closer look at how these financial instruments work and their importance for traders.
A futures contract is an agreement to buy or sell an underlying asset at a predetermined price on a specified future date. The underlying asset can be stocks, commodities, currencies, securities, or indices, such as Bank Nifty or nickel. Traders in futures are obligated to complete the transaction on the expiration date, which means they must buy or sell the asset as per the contract terms.
In contrast, options contracts grant traders the right, but not the obligation, to buy or sell an underlying asset at a pre-decided price until the contract expires. This flexibility allows options traders to opt-out of the transaction if it is not profitable, albeit for a premium paid in advance.
Every F&O contract has an expiration date, which is the date the contract ceases to be valid. It's essential to settle the contract before this date. Settlement can occur through cash settlement, where the contract is settled using money, or physical delivery, where the underlying asset is delivered to fulfil the contract. Futures contracts must be settled before expiration to avoid penalties, whereas options contracts can be allowed to expire without any penalties.
F&O contracts typically expire on the last Thursday of each month. For instance, a futures contract purchased on March 2 would expire on March 31, 2022, as the last Thursday of March. If the last Thursday is a holiday, the contracts expire on the preceding Wednesday. This specific expiration date does not apply to equity trading and is exclusive to F&O contracts.
The expiration date is significant for traders, as it often leads to heightened market volatility. All F&O contracts expiring on the last Thursday of each month create a deadline that traders must heed to avoid fines, especially for futures contracts. This deadline can influence market trends and the overall mood for the upcoming period. Arbitrage traders, in particular, closely monitor these dates to maximise their profits.
Understanding the mechanics of futures and options, along with their expiration dates, is vital for traders looking to navigate the complexities of the derivatives market effectively.
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