What Is Expiration Date in the Stock Market? Meaning and Examples

Expiration Date refers to the specific date on which a derivative contract (options, futures, etc.) ceases to exist. This date marks the end point for executing the rights attached to financial instruments. After this date, the contract is no longer valid.

Significance

• Ultimate Deadline: It acts as the final call for investors to decide on their investment strategy concerning the derivative contract.
• Value Impact: As the expiration date approaches, the value of the derivatives can experience volatility, influencing trading strategies.

Expiration Date in Action: Examples

Let’s clarify this concept with practical examples from the Indian stock market, using options and futures trading.

Example 1: Options Trading with Infosys

Imagine you hold an option to buy Infosys shares at a strike price of ₹1,400 per share, expiring in June. If, before or on the expiration date, Infosys’ share price rises above ₹1,400, you can exercise your option to buy at a profit. If not, the option expires worthless, with the loss limited to the option’s premium.

Example 2: Futures Contract on HDFC Bank

Consider a futures contract where you agree to buy 200 shares of HDFC Bank at ₹1,500 per share, with the contract set to expire in September. If HDFC Bank's market price exceeds ₹1,500 before the contract expires, you benefit. If it’s below, you may face a loss unless you decide to sell the contract before it expires.

Key Takeaways

• Critical Deadlines: The expiration date serves as a critical strategic deadline in the trading of derivatives.
• Influence on Strategy: The impending approach of the expiration date can lead to increased market activity as traders adjust their positions—either closing, rolling over, or allowing their contracts to expire.
• Market Volatility: Prices of the underlying assets can become more volatile as the expiration date nears, influencing the contract’s premium.

Conclusion

Understanding the concept of the expiration date is fundamental for anyone participating in the derivatives market. It informs crucial decision-making processes, affecting when to hold, sell, or exercise an option or futures contract.