Future and Options Settlement

POSTED BY radhevajrakaya ON September 27, 2012 12:59 am COMMENTS (4)

I wanted to know why Every Last Thrusday of the Month markets are down and the News for Example : in the everycorner is due to the expiry of September derivatives contracts on Thursday.

Iam not able to understand the reason for this I know that a large part of the trade takes place in F & O but what it has to do with the falling in Nifty & Sensex Indices before a DAY i.e Expiry on Thrusday.

Kindly someone Enlighten me.

4 replies on this article “Future and Options Settlement”

  1. Options by themselves derive value from the underlying financial instrument which is stock. Options are not independent.

    If I hold 250 shares of ICICI bought at 1000 and immediately decide to sell a Call Option for 1000 for September for Rs. 25 then my premium collected is 25*250 = Rs. 6250. If at end of expiry ICICI closes below 1000 then the entire premium is my profit and I will just still be holding 250 shares. If ICICI goes to 1100 then the option value will be 100 and since I sold option at 25 and will be forced to buy the options at expiry my loss in option trading is 25 minus 100 = -75 per share ~ 19000. However I can still choose to sell my stock at 1100 for a Rs. 100 profit => My net profit is still Rs. 25.

    Options are usually sold by institutions (volume wise). So if I sell an Option for 1000 my profits are max when I am able to pull the stock price below 1000. So institutions will sell ICICI stock in the market to artifically pull the price below 1000. Vice versa if they have bought the call they will buy more and more of ICICI stock so the call will have value.

    Thus the lots themselves have no value – Institutions manipulate stock price to suit their option positions which is why you see fluctuatioins on expiry day. Positions expire on the last Thursday you cant extend. Settlement depends on your broker some insist 2 pm some make it 3:15 pm ec.

  2. It happens because a lot of times , most of the people hold the future and options for the full month , and when on last thursday comes, they have to settle it , Settlement means selling off a lot of LOTS and due to this , the markets can go up and down , It can also go up , depending on the mood of the market .

    1. radhe says:

      Sir few more thoughts,

      If the F&O price on last Thursday is not according to the investors target price than will he have to sell it or keep it or can he continue the contract in next month .

      Can a investor sell before the expiry of the contract ?????

      Also on Last Thursday when the markets Open ,, it’s settlement is done that is selling of CONTRACTS at 9:15am ONLY or during the market working hours any time till 3:30pm .

  3. Dear Radhe, this happens due to settlement of that running month FnO series on last Thursday of that month.

    Thanks

    Ashal

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