In financial market, the expiry dates refers to the final day on which a financial contract, such as an option, futures contract, or forward agreement, is valid.

After this date, the contract either settles (through delivery or cash settlement) or becomes void.

As such it is wisdom to learn and understand expiry dates is because it is importnat for traders, investors, and businesses that use derivatives for hedging, speculation, or risk management.

What is an Expiry Date?

The expiry date is the predetermined date on which the obligations of a financial contract must be fulfilled. It signals the end of the contract’s validity and determines when:

• The holder must exercise the option or let it expire.
• A futures contract is settled.
• A forward contract reaches its agreed-upon settlement.

Types of Expiry Dates in Financial Instruments

1. Options Contracts

The expiry date is the last day the option holder can exercise their right to buy or sell the underlying asset.

American-style options can be exercised anytime before or on the expiry date.

European-style options can only be exercised on the expiry date.

2. Futures Contracts

Futures contracts have a specific expiry date on which they are either physically settled (delivery of the asset) or cash-settled (price difference exchange).

3. Forward Contracts

Forwards expire on the agreed date, with the buyer and seller settling their obligations directly.

4. Swaps

Swaps, such as interest rate swaps, also have expiry dates marking the end of periodic payments or the contract.

Importance of Expiry Dates

1. Contract Settlement

The expiry date determines when the contract must be settled, whether through physical delivery, cash payment, or expiration without action.

2. Market Activity

Expiry dates often see heightened market activity as traders adjust their positions to manage risk or avoid delivery obligations.

3. Time Decay for Options

For options, the closer it gets to expiry, the faster the time value of the option diminishes, a phenomenon known as theta decay. This creates urgency for traders to act.

4. Rollovers

Traders and investors holding futures contracts often “roll over” positions near the expiry date, moving to a new contract with a later expiry.

Factors to Consider About Expiry Dates

1. Impact on Prices

Prices of options and futures often fluctuate as expiry approaches due to changes in demand, liquidity, and market speculation.

For futures, the spot price and futures price converge as expiry nears.

2. Settlement Type

i. Physical settlement: The actual asset is delivered (e.g., commodities like oil or wheat).

ii. Cash settlement: Only the price difference is exchanged (common for financial instruments like stock indices).

3. Last Trading Day

The last trading day is often one day before the expiry date, especially for futures and options.

4. Automatic Exercise

Some contracts, like in-the-money options, may be automatically exercised if the holder does not take action by the expiry date.

Expiry Date in Practical Scenarios

Example 1: Stock Options

An investor holds a call option to buy 100 shares of a stock at $50, expiring on December 15.

• If the stock trades at $60 on December 15, the investor can exercise the option, earning $10 per share.
• If the stock trades below $50, the option expires worthless.

Example 2: Commodity Futures

A coffee producer sells a futures contract for 1,000 pounds of coffee at $2.50 per pound, expiring on March 31.

• If coffee prices fall to $2.20 per pound by March 31, the producer gains from locking in the higher price.

Example 3: Currency Forwards

A company enters a forward contract to buy €1 million at an exchange rate of 1.10 USD/EUR, with an expiry date of June 30.

• On June 30, regardless of the prevailing exchange rate, the company will settle at 1.10 USD/EUR.

Expiry Date vs. Other Major Dates

1. Settlement Date

The settlement date is when the actual exchange of money or assets occurs, often shortly after the expiry date.

2. Maturity Date

Used interchangeably with expiry in some contexts but often applies to bonds and fixed-income securities.

3. Exercise Date

For options, it is the date the holder chooses to exercise their right, which must be on or before the expiry date.

Strategies Around Expiry Dates

1. Close Positions Early
To avoid the complexities of settlement, many traders close positions before expiry.

2. Roll Forward
Traders can roll over their positions into new contracts with later expiry dates to maintain exposure.

3. Hedge Risks
Businesses and investors use derivatives with specific expiry dates to hedge against adverse price movements.