Square off

When you square off your position by selling your Options in the market, you will earn a premium as the seller of an Option. Your profit or loss will be the difference between the premium at which you bought the Options and the premium at which you sold them. You should square off your option on or before expiry. What if you failed to square off on expiry? Can you square of options before expiry? this and many such questions are answered in this blog. This blog contains all the details which you want to know related to expiry and square off.

What is square off?

Squaring off in day trading means closing all open positions by the end of the trading day. Hence, if someone has bought, he must sell and if someone has sold, he must buy before the market closes. i.e. closing a futures contract by taking a position that is opposite to the position taken originally. It is the trading method used by traders, commonly in day trading, in which a trader buys or sells a specific quantity of an asset and later in the day reverses the transaction, in hope of earning a profit.

What happens if we do not square off options on expiry?

If you don't square off your positions in the stocks before the close of trading hours on the expiry day, you will either have to take delivery or give delivery of the underlying stock for the contract.

What if you square off delivery positions in intra-day itself?

If you do so, you will have to pay brokerage based on the type of the trade, i.e. delivery or intra-day, irrespective of order type if you enter and square-off the position inequities on the same day, trade is considered as an intraday trade and brokerage will be charged accordingly.

What is expiry?

The expiry date is the date on which a particular contract expires. Every derivative contract, which is based on an underlying security such as a stock, currency, or commodity, has an expiry date, however, the underlying security usually does not have any expiry date. A derivative contract depending on an actual asset is only valid for a certain time period before it expires. In the case of Indian stock exchanges, the expiry date is the last working Thursday of the month i.e.the contract expires on the last working Thursday of the month.

How to square-off options contract?

A derivative contract based on underlying security exists only for a certain period, which ends on its expiry date. On the expiry date, the derivative contract is settled between the buyer and seller. The settlement happens in one of of the following ways:

Physical delivery:

In the physical delivery of the underlying security under a particular contract, the seller of the contract delivers the quantity to the buyer, who pays the full price for it.

Cash settlement:

It means the settlement of the difference between the spot price and the derivative price through the exchange of money and not the underlying security itself. Currently, in India equity derivatives are settled by cash.

What happens if you don't square off before expiry?

If you don't square off, you will have to replenish the margin amount as required by the exchange. By doing so, you can carry the short positions in the options till the expiry. If you decide to square off your position before the expiry of the contract, you will have to sell the same number of Call Options that you have purchased, of the same underlying stock and maturity date. Every contract is valued at a certain amount. The price of the actual share on the secondary stock market i.e.cash market, where you purchase and sell shares immediately is associated with this. As a result, every contract's settlement value is decided by the last-day closing price of the cash market share.

Why does last-day closing price affect share prices?

The value of futures and options contracts is decided by the actual equities or indices. Derivatives contracts, on the other hand, can affect stock values over a short period of time. Consider that investors are in a belief that an asset will rise in value. As a result, the amount of 'Buy' contracts in the futures markets increases in the opposite manner to 'Sell' contracts. Therefore, cash market investors may begin to purchase stock in the supposition of rising prices. When good amounts of money are invested in a short period of time, the stock price jumps.

Terms related to Expiry Date in Indian Stock Market

Arbitrage Trading

Traders review their derivatives holdings a few days or a week before expiry to see if they are genuinely profitable or not. These traders frequently hold stock in both the derivatives market and the secondary stock market. To make money, they may purchase on the stock market and then sell on the derivatives market. Arbitrage trading is the term for this type of trading. To avoid losses, these traders may choose to terminate or unwind their bets near the expiry date. In this case, they may be able to sell the shares freely on the secondary market. At the same time, other traders may act in the exact opposite manner.

Rollover of contracts

A contract rollover means squaring off the current month's contract and start a new one for the next month. This is done by the trader to keep the derivatives contract open after the close of the near month, and thus the position is moved to the following month, as is generally the case in a Bull market. In short, if a trader has a position in the near month, he will have to settle it on expiry day, instead of exiting it to expire on its own. just like the non-physically settled contracts, which expire on their own.