What Happens on Expiry Day
On the expiry day, an index option contract settles and ceases to exist. In the final hours, premiums can fall or rise very quickly, because small index moves change the probability of finishing in the money. This makes expiry day one of the most volatile sessions for option buyers and sellers.
Why Time Decay Is Sharpest Near Expiry
Time value shrinks fastest in the last few sessions. An out-of-the-money option that looked cheap on Monday can lose most of its premium by Thursday if the index stays in a range. Buyers need a timely move; sellers face the opposite risk of an unexpected sharp swing.
Risks That Are Often Overlooked
- Wide bid-ask spreads and slippage when the market moves fast.
- Margin requirements for option sellers, which can be high and can change.
- Unlimited loss potential in uncovered option selling.
- Exchange rules about contract specifications and expiry schedules, which can be revised, so always check the latest circulars.
How to Prepare for Expiry Week
Review your open positions earlier in the week, decide in advance what you will do if the market moves against you, avoid increasing position size to chase quick gains, and keep the maximum loss within your risk limit. Staying out on a day when conditions are unclear is a valid decision.
A Note on Risk
Derivatives are high-risk instruments and a large share of individual traders lose money in them, according to SEBI's own studies. This content is educational and not a recommendation.
