Stock markets provide the option of investing in stocks and other assets as well as trading in them. Trading has become a popular career option for many in recent times due to many reasons like increased awareness, better regulation of markets, post-pandemic scenarios, etc. Traders have the option to trade in either futures and options, forward contracts, or swaps. Trading in these markets requires a huge knowledge base and a good amount of expertise. Hence, it is important to know all the related terms and concepts before taking a plunge into these markets.
On similar lines, for traders looking to trade in futures and options, it is important for them to understand the meaning of the term F&O expiry and its impact. Given below are the details of the same.
What is F&O trading?
Before learning about the F&O expiry, it is important to know the basic meaning of F&O trading. F&Os are futures and options contracts where the price of the contract is based on the performance of its underlying assets. A futures contract is where the buyer and seller enter a contract to buy or sell the underlying asset at an agreed price at the agreed date. This contract is an obligation that has to be met failing which there is a penalty to be be borne by the defaulting party.
In an options contract, on the other hand, the buyer of the contract has the option to buy or sell the asset at the option price. The major difference between a futures contract and an options contract is that there is no obligation in the latter.
What is F&O expiry?
F&O market is regulated by SEBI and the traders have to abide by the set rules and regulations set in this regard. One of the key features of the F&O trade is the expiry of the contract. F&O expiry is the date when the contract is no longer valid. The traders must square off their positions before the expiry date as all open positions are closed on the expiry date.
In the F&O market, the last Thursday of any month is set as the expiry day to streamline the process and to remove any confusion. This implies that the expiry of all the F&O contracts for February 2022 will be 24th February 2022. The expiry date is constant irrespective of whether the contract is entered at the start of the month or anywhere in between.
In case the exchange is closed on the last Thursday of the month or trading is suspended, then the previous trading session i.e. Wednesday will be considered as the expiry date for the F&O contracts.
What is the impact of F&O expiry?
The impact on F&O expiry is different in the case of the Futures and options market. Let us understand the impact of F&O expiry on the options and futures market.
For the futures contract, the trader has two choices for the treatment of the contract.
- The trader can settle the futures contract in cash on the expiry date.
- The other option to settle the futures contract on the expiry date is buying another contract that will cancel the previous futures contract. For example, if the trader has a futures contract to buy 500 stocks of Company A, they can buy another futures contract to sell 500 shares of the same company. This second contract cancels the original futures contract. The trader will, however, have to pay any price difference that arises on account of the difference in the price of the underlying asset between two contract dates.
In the case of an options contract, unlike the futures contract, there is no obligation to buy or sell the security. Traders pay a premium for such privilege which is known as the cost of such options. Therefore, on the date of the expiry of the options contract, if the trader has not exercised the option, such option will simply lapse. The premium paid by the trader will be their maximum loss.
How can F&O expiry impact the stock market?
The F&O expiry can have a direct impact on the stock prices. When the markets are bullish, the traders may see an increase in the buy contracts of the asset as compared to the sell contracts. The resulting impact can be seen in the cash market too as the investors may start purchasing the given stock more in anticipation of increasing prices. When the cash market sees a huge influx of investors buying the stock, the market witnesses a significant rise in the stock prices and vice versa.
F&O trading has seen a huge increase in the number of traders, especially in the post-pandemic market. For all these new traders, getting a clear idea of all the nitty-gritty of the trade is imperative if they want to succeed. F&O expiry is an important feature of the F&O trade as making an error in this regard can lead to huge losses for the traders.
The two types of expiry in the F&O market are physical delivery or cash settlement. In India, the settlement of F&O contracts is through cash settlement.
Rollover contracts are when the trader squares of the existing contract in the current month to take a new position in the same contract for the following month. In this manner, the trader gets to keep the contract open for the following month as well as at the same time abide by the expiry rule of the previous contract.
If the last Thursday of the month is declared a holiday, the previous trading day will be considered to be the expiry day for that month.
The two options available in options trading is call option (option to buy) and put option (option to sell).
No. Under the options contract, the buyer of the option does not have the obligation to fulfill it.