What is Expiry Day Trading? How to Trade, Importance & Benefits

As traders tend to look for more techniques and thrills while trading in the stock markets, more unique strategies are incorporated into daily transactions.

Expiry day trading involves trading derivative contracts like options and futures on their expiration date. In India, these dates vary by contract: weekly and monthly index options for Nifty 50 and Bank Nifty expire on Thursdays, Nifty Financial Services (Finnifty) options expire on Tuesdays, and Nifty Midcap Select options expire on Mondays. Monthly stock options and futures expire on the last Thursday of the month. This technique is also applied to futures and other derivative contracts.

What Is Expiry Day Trading?

Expiry day trading is trading or dealing done by buying and selling futures and options contracts on their last valid day. The objective is to leverage market volatility in their favour and gain from quick price fluctuations.

Traders need to speculate and preempt the prices of the contracts when they want to sell on the expiry day. Many buy at low premiums, expecting a greater percentage of profit on the expiry day trade.

Timing is of the essence, as contracts lose value near expiry dates, and even a slight deflection in price can significantly affect the gain or loss. It is also crucial to closely monitor trade and market movements to manage risks and make the right move at the right time.

Importance of Expiry Dates in Trading

The expiry day strategy in options trading is vital as the validity date influences settlement management risk and can help control market influence. The significance of expiry dates further includes:

• Settling the Contracts: Expiry day trading strategies include buyers closing the trade by either using the options or letting it expire. The sellers are obligated to act if options are used.
• Rapid Time Value Loss: Time decay is the loss of the time value of options that happens as the expiry date approaches. This tends to reduce the option price even further.
• Market Volatility on Expiry Dates: Since expiration days are usually fixed, the volume of trades increases exponentially each day. This may lead to higher market movements and sudden price fluctuations.
• Mitigating Risks: Close monitoring of market conditions and tracking expiry days helps counter risks in such trades. Extending the same and not closing often leads to significant losses.

How To Make Trades On Option Expiry Day?

To make your expiry day option trading success, the strategy you need to adopt involves:

• Initiate by studying various market trends, news, and research to anticipate price movements.
• Concentrate on options that may look unviable currently but may turn profitable with favourable market moves.
• Set a stop loss price to keep a check on your profit targets and follow them to manage risks.
• Keep a close watch on the market throughout and stay updated with news and information related to your trades.
• Place limit orders in your trade to ensure entry and exit at your desired price.
• Focus on spreads as they can limit risk and have the potential to gain. You can also opt for a bull call spread, where you can sell a call option at a higher strike price than an option you buy.

How to Do Expiry Day Trading?

Expiry day option buying & selling require you to have some tricks up your sleeve. For an option trading strategy on expiry day, you need to focus on both to understand the spread.

Expiry Day Trading Strategies – Mistakes to Avoid

To most experienced traders, expiry day trading means lucrative and significant returns. However, to optimise risk and return, like any other market trade, certain errors are to be avoided at any cost:

• Do not wait too long to purchase your options during expiry day trading. The value of options diminishes as the expiration date approaches.
• Ensure you research market trends, past data, and other relevant information before initiating a trading transaction. You need to monitor the market regularly.
• Factoring in market volatility is important as it is usually high on expiry dates.
• Make prudent choices to diversify your trades across different options and varied underlying assets.
• Plan all the details before you enter expiry day trading. Determine your entry and exit prices, risk mitigation plans, stop loss, and profit targets to create a clear trading plan, especially if you’re considering how to plan your options trading around expiry dates.

Advantages of Expiry Day Option Buying Strategy

Traders attuned to the latest market information and who can effectively manage risk can benefit significantly from expiry day trading.

• The price of options decreases as expiry dates near, enabling traders to lower the cost of purchase.
• The leverage is relatively higher in expiry day trading, as small price fluctuations can trigger higher returns, leading to quicker profits.
• The maximum loss is limited to the premium paid for buying the options, making it easier to manage risks.
• Trading positions can be adjusted throughout the day, making it convenient to keep track and manage risks.
• High market volatility can create lucrative opportunities and healthy returns if you time your deal well.

Conclusion

Expiry day trading requires an understanding of complex market assets and processes, such as derivatives, commodities, options, and futures. It also requires a strong appetite for taking high risks and enduring significant losses.

If you want to begin this journey with investible mutual funds, your decisions need to be backed by solid strategies, up-to-date research, extensive market knowledge, and strong monitoring techniques.