DEFINITION of the expiry date
The expiry date is the date, as the name suggests, on which a particular contract, usually a derivative contract, expires.
WHAT IT IS IN ESSENCE
Every derivative contract, which is based on an underlying security such as a stock, commodity, or currency, has an expiry date. Though the underlying security usually does not have any.
The moment when a trading position automatically closes is known as the expiry date or expiration date. In the case of Indian stock exchanges, the expiry date is the last working Thursday of the month when the contract expires. It can vary from product to product. Spread bets, for example, always have a fixed expiry date. CFDs do not unless they are on futures.
Every expiry day is very busy as all cash-settled futures are closed at the settlement price. This is happening by 30 minutes average of the cash market. So that no one can manipulate the closing price.
HOW TO USE
On the expiry date, the derivative contract is finally settled between the buyer and seller. The settlement happens in either of the following ways:
Physical delivery: In case of physical delivery of the underlying security under a particular contract, the seller of the contract delivers the quantity to the buyer. The buyer pays the full price for it.
Cash settlement: It means the settlement of the difference between the spot price and the derivative price through the exchange of money. And not the underlying security itself.
Suppose there are three futures contracts, namely:
- Near month contract expiring on Jan 28, 2016
- Next month contract expiring on Feb 25, 2016
- Far month contract expiring on Mar 31, 2016.
A buyer can buy any of these contracts until the end of the working day on Jan 28, 2016, which is a Thursday. On Jan 28, 2016, the first contract, i.e. the near-term contract, will be settled in cash.