Option expiry day basics: what changes on the last day

The last trading day of an option contract is called expiry day. Prices behave differently on that day, and the risks are larger. This guide covers the basics.

How settlement works

• Index options (such as Nifty and Bank Nifty) are cash-settled. At expiry the difference between the closing value and the strike is paid in cash, and no shares change hands.
• Stock options are settled by physical delivery in shares. If you hold an in-the-money stock option to expiry, you may have to take or give delivery, which needs enough money or shares.

Check your broker's rules, because they may square off positions earlier than the exchange.

Time decay speeds up

An option's time value shrinks as expiry approaches, and it shrinks fastest in the last few days, especially for at-the-money options. By the closing bell, an out-of-the-money option is usually worth little. This is why selling options appeals to some traders, and why buying them is hard.

Gamma risk

At-the-money options have very high gamma close to expiry. A small move in the index can change an option's price by a large percentage in minutes. This cuts both ways: gains and losses can come fast.

In-the-money and out-of-the-money at expiry

• An option that finishes in the money is worth its intrinsic value (the difference between the closing value and strike).
• An option that finishes out of the money expires worthless.

Risks to know

• Selling options on expiry day can lose many times the premium collected. Margin requirements are strict, and brokers can square off positions.
• Liquidity can be thin at deep strikes, so prices you see may not be prices you can trade at.
• Settlement values and rules can change. Check the exchange's current circulars.

A checklist before expiry day

• Know whether your contract is cash-settled or delivery-settled, and what your broker does with open positions near the close.
• Check how much margin a position needs on expiry day, because the requirement can rise.
• Decide in advance how much you can afford to lose on the day, and what you will do if the market moves against you quickly.
• Remember that the price you see on the screen may differ from the price you get, especially in fast markets.

Using end-of-day data

Tradingraph's chain is built from the previous session's closing prices. The nearest expiry shown is always one that still has time left. For a contract that expired on the data date, the tool moves on to the next expiry, because its prices after settlement are not meaningful.

This page is for information and education only and is not trading advice. Options can lose all of the amount invested, and sellers can lose more.