How Derivatives Or F&O Expiry Impact Stock Prices And Indices?

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    Every month end we see stock market movement to be influenced by derivatives or F&O expiry so here is an explanation in context of it.

    How Derivatives Or F&O Expiry Impact Stock Prices And Indices?

    Despite the usual stock trading, there is yet another form i.e trading in derivatives and this includes F&O contracts. Future contracts are the ones in which buyer of the contract agrees to buy or sell the underlying i.e stocks in the current context at some future date at a fixed price. And the obligation to the contract has to be compulsorily met at all costs.

    On the other hand, in the options contract, the buyer may or may not exercise the contract depending upon the market conditions and in the otherwise can let the contract expire.

    Derivatives or F&O expiry

    So, the contract expiry happens at a future date or the contract obligation has to be fulfilled by this day which in stock market parlance is referred as derivatives or F&O expiry. The exchanges in a bid to avoid any confusion have decided last Thursday of every month as contract expiry date. And in case it happens to be a public holiday then contracts are to be settled on the previous trading session.

    What happens on the F&O expiry date?

    The futures contract have to be settled whereas options contract can also be cancelled. As a whole, to complete or settle the trade in derivatives, one can either opt for another contract to nullify the existing contract that has to be settled or transact in cash.

    Say, for instance, in case you had bought a futures contract to buy 10 shares of Company A then on the expiry date, you can settle the trade by placing the buying contract for selling 10 shares of the same Company A and hence complete the trade by paying the difference amount for the two contract.

    Also, it is to be noted that the settlement value in case of each contract is linked to the underlying stock's closing price on the last day.

    How F&O expiry influence share market or stock price movements?

    The contract's value is based on the price of the underlying stock in the cash market and if there is any positive sentiment, the buy contract gain in demand in comparison to sell contracts. And seeing the trend in the derivatives markets, participants in the cash market can begin to push demand higher of the same scrip anticipating higher price in future. Consequently, the price of the stock is pushed higher.

    Goodreturns.in

    Story first published: Friday, June 1, 2018, 15:21 [IST]
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