If you’re new to options trading, it might feel a bit confusing at first. But don’t worry—once you break it down into simple parts, it becomes much easier to understand. In this guide, we will explain three important concepts that are essential for every options trader: option expiry, duration, and rollovers. Understanding these terms will help you make smarter trading decisions and improve your strategy.
What is Option Expiry?
In options trading, option expiry is the date when an options contract ends. Every option contract has an expiration date, which is the final day you can either use (exercise) the option or let it expire.
When an option reaches its expiry date, you have to make a choice. You can either:
- Exercise the option (use it to buy or sell the underlying asset).
- Sell the option if it’s still worth something.
- Or simply let it expire, which means it becomes worthless.
For most options, the expiry date is typically the last Thursday of the month. However, if that day is a holiday, the expiry will happen the day before.
It’s very important to know when your option expires because after the expiry date, the option loses all its value. You won’t be able to do anything with it anymore, so you need to decide what to do before that happens.
Timing and Expiry in Options Trading
Timing is everything when it comes to options trading. Why? Because options only last for a certain period of time, and as you get closer to the expiry date, your options lose value.
The more time an option has until expiry, the more potential it has to become profitable. As the expiry date gets closer, the option’s price starts to decrease. This is because there’s less time for the price of the underlying asset (like a stock or index) to move in your favor.
For example, let’s say you bought a call option that gives you the right to buy a stock at a certain price. If the stock doesn’t move toward your price target before the expiry date, the option will lose value and eventually become worthless if not exercised.
So, timing is crucial. If you’re too close to expiry, there may not be enough time for your option to become profitable.
Understanding Cost and Duration of Options
When choosing options, there are two important things to consider: cost and duration.
- Cost: The cost of an option depends on how much time is left until it expires. Longer-duration options cost more because they give you more time for the underlying asset’s price to move. For example, if you buy a call option that expires in 30 days, it will likely cost more than a similar option that expires in 3 days. This is because the longer option gives you more time to potentially profit.
- Duration: The duration is simply how much time is left before the option expires. For example, if you think a stock will move in a certain direction in the next 10 days, you want to buy an option that expires in at least 10 days. If you buy an option that expires in just 2 days, you might miss the opportunity to profit if the stock moves after your option expires.
So, when you’re choosing an option, you need to think about how much time is left before it expires and how much it costs. Longer-duration options are more expensive but give you more time for price changes to work in your favor.
Example of Option Premiums Based on Expiry Date
Here’s a simple example to show how the cost of an option changes based on the expiry date. Let’s take the Nifty index and look at the price (premium) for call options with different expiry dates:
| Call Option Contract | Expiry Date | Option Premium |
| Nifty Nov 24200 CE | 28/11/24 | 191.00 |
| Nifty Nov 24200 CE | 26/12/24 | 513.95 |
| Nifty 25JAN 24200 CE | 30/01/25 | 744.45 |
From this table, you can see that the further away the expiry date, the higher the option premium (price). This happens because options with more time left have a higher time value. The time value is the extra value added to the option because there is more time for the underlying asset to move.
The Trading Cycle and Expiration
In options trading, there is a cycle that tells you when options are available to trade and when they expire. Most options follow a three-month cycle, broken into three periods:
- Near-month contracts: These expire in the current month.
- Next-month contracts: These expire in the following month.
- Far-month contracts: These expire in the third month.
There are also weekly options available for popular indexes like the Nifty, which expire every Thursday. Knowing this cycle helps you decide when to enter or exit a trade.
Once an option expires, you need to decide what to do. If your option is in-the-money (meaning you would make a profit by exercising it), you can either exercise it or sell it. If the option is out-of-the-money, it expires worthless, and you lose the premium you paid for it.
Rollovers: Keeping Your Positions Active
Sometimes, traders want to keep their positions open even after an option expires. To do this, they use a strategy called rollovers.
A rollover happens when you close your position in an option that is about to expire and open a new position in an option with a later expiry date. This lets you extend your position without having to sell or exercise the option.
Why Use Rollovers?
If you believe a market trend will continue, but your option is about to expire, a rollover allows you to extend your position. It’s a way to keep your position active without letting the option expire. Instead of letting the option run out, you transfer your position to a future date.
How Do Rollovers Work?
On the expiry date, you can close your position in the near-expiry option and immediately open a new position with a longer expiry. This helps you maintain your market exposure without having to liquidate your position. Rollovers are common in markets like the Nifty, where traders often want to extend their positions.
Rollover Ratio: An Important Tool for Traders
Traders use the rollover ratio to help understand market sentiment. This ratio compares the open interest (OI) in options for different expiry months and shows whether many traders are rolling over their positions.
The formula for the rollover ratio is:
Rollover Ratio = ((Mid-Month OI + Far-Month OI) / (Current Month OI + Mid-Month OI + Far-Month OI)) × 100
If the rollover ratio is high, it means that many traders are keeping their positions open and rolling them into the next expiry month. This suggests they are confident that the current market trend will continue.
By understanding these basic concepts—option expiry, duration, and rollovers—you’ll be better prepared for options trading and be able to make more informed decisions. With time and practice, these concepts will become second nature, helping you trade smarter and more effectively in the dynamic world of options trading.
Key Takeaways
- Consider cost and duration: Always weigh the cost of the option against how much time is left until expiry. Longer-duration options are more expensive but give you more time for the asset’s price to move.
- Rollovers keep your positions active: If you want to extend your position beyond the expiry date, use a rollover strategy to keep your position open.
- Watch the rollover ratio: A high rollover ratio suggests that traders are confident the current market trend will continue.
- Expiration dates matter: Keep track of when your options expire. As the expiry date approaches, the value of the option decreases, so you’ll need to decide quickly whether to sell, exercise, or let it expire.
