4. Option Expiry & Settlement in India

Options aren’t forever – they have an expiration date. In India, index options (like NIFTY, BANKNIFTY) and stock options have specific expiry cycles. Understanding expiries and how settlement works is crucial, especially to avoid last-minute surprises.

Weekly vs. Monthly Expiry:

• Monthly Expiry: Traditionally, equity and index options in India expired on the last Thursday of every month. This is the monthly contract. Even today, every optionable stock and index has a monthly expiry. For example, a “March 2025 NIFTY 18,000 Call” will expire on the last Thursday of March 2025.

  

• Weekly Expiry: In recent years, weekly index options have gained popularity. NIFTY and BANKNIFTY options have weekly expiries every Thursday (except when Thursday is a holiday, then Wednesday). This means each Thursday, all the options that expire that week cease trading. Weekly options provide more granular opportunities (and risks) for traders and are very popular for short-term strategies. BankNifty, for instance, sees heavy volumes in weekly options.

• Upcoming Changes: Regulatory authorities have noted the explosive growth in weekly contracts. There’s a move to rationalize weekly expiries – for instance, SEBI decided that only one benchmark index per exchange will have weekly options going forward. So in the future, we might see either only Nifty or only BankNifty having weeklies (as of now, both do). Keep an eye on SEBI/NSE circulars for such changes.

Trading up to Expiry:

On expiry day (Thursday for weekly/monthly), trading in the expiring options stops at the end of the trading session (3:30 PM IST). After that, all options are settled. If you hold an option till expiry, a few things happen:

• If the option is OTM (out-of-the-money), it expires worthless. You lose any premium you paid (if you were the buyer), or if you sold it, you keep the premium (minus any buy-back you did).

• If the option is ITM (in-the-money) even by a small margin, it will typically be automatically exercised (in Indian markets, equity and index options are European style, meaning they can only be exercised at expiry, not before). The profit will be settled to you in cash (for indices) or you’ll have settlement obligations (for stocks).

• ATM options (essentially ITM by ₹0) might be a toss-up due to settlement price rounding. Generally, if an option expires exactly ATM, it’s considered worthless (no one gains/loses beyond premium).

Settlement Mechanism

• Index Options (Cash Settlement): NIFTY, BANKNIFTY and other index options are cash-settled. This means if your option expires ITM, you get the difference in cash. For example, if you had one Nifty 18,000 Call and Nifty’s closing (settlement) value is 18,100 at expiry, your call is 100 points ITM, so you receive ₹100 * 50 (lot) = ₹5,000 (minus any fees) in profit. If you were short that call, you pay ₹5,000. No actual buying or selling of the index happens (you can’t “buy” the index; it’s just a number).

• Stock Options (Physical Settlement): This is very important – since 2019, all stock (single stock) F&O in India go through physical settlement on expiry. That means if you hold a stock option through expiry and it’s ITM, you might have to buy or sell actual shares. For example, if you sold a RELIANCE 2400 Call and at expiry Reliance is ₹2450 (ITM by ₹50), you as the call writer have to give delivery of Reliance shares at ₹2400 to the call buyer. That means you need to have the shares or will be short-delivering (which has its own auction penalties). Similarly, ITM puts might result in taking delivery of shares. For retail traders, this means you must be cautious: unless you intend to buy/sell the actual shares, close out stock option positions by expiry if they are in the money. Many brokers will auto-square off such positions on expiry to avoid physical delivery for clients who don’t have the stock or funds.

• Settlement Price: For indices, the settlement price is usually the closing index value (which on expiry day is often the last 30 min weighted average). For stocks, it’s the closing price of the stock on expiry day. Profits/losses are based on that.

Expiry Day Volatility & Risks:

Expiry days can be volatile, especially the last hour (often called the “expiry hour”). You might observe the index whipping around as large players unwind positions. There’s also a phenomenon where out-of-the-money options rapidly lose value (time decay crushes the remaining premium to zero in final hours). If you’re an option buyer, note that an OTM option that hasn’t moved into ITM by the last few minutes will likely expire worthless – the premium can go from a few rupees to zero very fast. Option sellers often try to profit from this last-day time decay, but they face the risk of sudden moves. Be extra careful trading on expiry day:

• Avoid holding large short option positions into the final minutes unless you can manage assignment/physical settlement.

• Be mindful of liquidity: some far OTM strikes may stop trading or have wide spreads near the end.

• Know that after 3:30 PM, you cannot exit – whatever ITM options you have will result in settlement obligations.

Weekly vs Monthly Dynamics:

Weekly options usually have less time value and decay faster (since their lifespan is short). Monthly options have more time value earlier on but as they near the last week, they behave like weeklies. Also, monthly expiry (last Thursday) often coincides with banks’ futures & options expiry globally, which can add volatility.

In summary, always know when your option expires and plan your trade around it. Don’t be the trader caught saying “oh I thought it expires tomorrow!” on Thursday evening – that’s a painful lesson.

Now, let’s move from individual contract specifics to a broader market indicator: Open Interest and how it can be a window into market sentiment.