How Option Expiry Day Trading Works?

The buyer of a call or put option must purchase or sell the underlying asset by a specific date at the strike price. The last day of the futures and options (F&O) contract is known as the “expiry day".

The last Thursday of the month is the expiry day for monthly options contracts. In addition, we have weekly contracts of Nifty and Bank Nifty that expire on every Thursday. Weekly options are not available for all underlying assets.

The buyer of a call or put option is not obligated to remain invested till the expiry of the contract. Before the expiry date, the buyer of a call or put option can get out of the position by selling or exercising it. 

How to trade on expiry day? An order to "sell to close" would accomplish this by selling the contract back to the market, thus ending the trader's position.

Some investors may let a losing option position expire. In the case of a call option, this would indicate that the current market price is lower than the option's strike price. To illustrate, let's say you invested in a call option with a Rs 205 strike price, but the stock is trading at Rs 185 on the day it expires.

How to trade on Option Expiry Day

For options trading on expiry day, it is standard practice to: 

● Be extra careful to avoid leaving money on the table and to liquidate lucrative positions when possible

● Getting out of perfect situations

Having an in-the-money (ITM) option increases your chances of assignment as the expiration date approaches. However, the assignment risk dramatically increases as the expiration week progresses.

Let’s break down the benefits of expiry day trading for both options purchasers and sellers below.

Options buyers at expiry date: One frequent expiration trading approach involves purchasing options with different strike prices. The stock's probability of moving in their favour and expiring ITM will, after that, grows. As time passes, the cost of an option's premium drops dramatically.

Options sellers at expiry date: At the time of options trading on expiry day, sellers of options take a backwards-looking perspective. Selling many contracts at or near the same strike price to accumulate as much premium as possible is a common expiry trading strategy. Sellers of out-of-the-money (OTM) options do so on the expectation that the options will eventually expire worthlessly.

This expiry-day options strategy may seem low-risk, but they are dangerous. You need a well-thought-out expiry trading strategy to reduce these dangers.

Does trading work on expiry day?

How to trade on expiry day? Keep in mind that on expiration day, the time value of all options (both ITM and OTM) is essentially zero. By noon, the time value of any option more than 2% OTM from the spot price will be close to zero, while the value of any option more than 2% ITM will be the same as the intrinsic value.

A stock's current market price (CMP) and an options contract's strike price are known as its "intrinsic value". If the Nifty strike price is 18,250, for example, a call option with a strike price of 18,500 will be worth almost nothing at noon, but a call option with a strike price of 18,150 will be worth nearly 100 because it is ITM. Any ITM option will act more like a Future than an Option.

On expiry day trading, the Delta would be either 1 or 0. Delta is close to 0 for all OTM choices and close to 1 for all ITM options.

When Nifty is at 18,250, and a call is purchased for 18,150 on the expiration date, the trader gains 10 points if Nifty rises by that amount and loses 10 points if Nifty falls by that amount ― exactly like a Future would react.

Conclusion

Knowing when an option will expire is crucial before making any trade on expiry day. An options contract has no further effect after its expiry date. If your contract is profitable when it reaches maturity, you risk having it exercised. Make sure you have an exit strategy outlined in your trading plan.

Expiry day options strategy, including short premium options, are more likely to succeed, generating more significant income.

Everybody is capable of learning the ropes of trading on the expiration day. Before selling any real cash, you should put these expiration day ideas through their paces on a practice account.

FAQs

Q. Should ITM options contracts be squared off before expiration?

ITM options should be squared off before expiration. Keep in mind that the actual market remains bustling on expiry day, making it a crucial day to trade.

Q. When does a stock's "expiration day" occur in the stock market?

The last trading day of a derivative contract, such as futures or options, is known as the expiration day in the stock market.

Q. When does an expiration date become invalid?

An options contract's expiration date is the last day it can be exercised. The expiration date is the most important day in stock trading. Typically, there is a discernible rise in trading activity for options contracts as this date draws near.