Last Trading Day in Futures and Options

Introduction:

Futures and Options are financial trading instruments known as derivatives. They are fundamentally different from other traditional investment tools like shares and stocks when it comes to their trading mechanism. The ‘last day trade’ in an F&O contract holds a lot of importance in derivatives trading.

Understanding the basics of a Futures and Options contract

Futures and Options are agreements to buy or sell an underlying asset at a pre-decided price in the future. The underlying assets could be indices, stocks, commodities, securities, currencies, etc. A futures contract is binding and dictates that you trade the asset at the pre-decided price on a particular date in the future. Thus, this takes place at the fixed price, irrespective of the ongoing market price of the said asset.

An options contract, on the other hand, allows you to trade at the pre-decided price until the expiry of the contract. The options contract gives the buyer the choice to trade if the deal is profitable. The buyer can otherwise postpone this till the contract expires, or not proceed with the trade and let the contract expire. This privilege of the contract comes with a premium that the buyer in the options contract has to pay to the seller in advance.

Futures and options were introduced as a hedging tool for protection against sharp price rises or dips in assets. These could otherwise lead to subsequent heavy losses for the investor. Over the years, these derivative contracts have also gained traction for earning revenue through speculative trading.

What is the ‘Last Day Trade’ in an F&O contract?

According to regulation body guidelines, the date till when you can trade an F&O contract is called the ‘Last Day’ in trading. Effectively, the last day of trade in a derivatives contract is one day before the expiry of that contract. Typically, this expiry date is fixed by the exchange as the last Thursday of every given month. In case that day is a trading holiday, then the previous day is considered as to be the contract’s expiry date. The last trading day holds significant importance for investors as it is their final opportunity to benefit from the contract they hold. That’s one of the reasons for increased volatility in the stock, security, and commodity markets in the last few days of every month.

What happens on the expiry date of an F&O contract?

On the expiry date of a derivatives contract, all the terms become void. Understand the technicalities involved in the following derivative variants:

Futures

A futures contract that hasn’t been traded till the expiry day has to be settled by either   delivery of the underlying asset or   with money. You can also nullify your futures contract with another contract. For instance, assume your future contract allowed you to buy 50 units of ‘X’ mutual fund. If this is not traded, you can settle or nullify this contract by purchasing another futures contract that allows you to sell 50 units of ‘X’ mutual fund. The price difference between these two futures contracts is the loss or profit you make.

Options

An options contract just expires on the expiry date of the contract if the trade was not conducted.  The premium paid by the buyer to the seller at the commencement of the contract is considered a loss for the buyer and profit for the seller in.

Conclusion

The last trading day of your derivatives contract can be your deal maker or breaker. Hence weigh your trading decisions properly and be well versed with the nitty-grittys involved in the derivatives segment to be in a profitable position.