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Why should all derivative contracts expire on the same day?

Why should all derivative contracts expire on the same day?

Traditionally, all major derivative contracts in markets such as India expire on the last Thursday of each month, from index futures to stock options. This rule may seem arbitrary at first glance, but in reality, it serves a vital function in maintaining market efficiency, fairness and stability.

Vijay Sardana
  • Updated Apr 16, 2025 11:11 AM IST
Why should all derivative contracts expire on the same day?Aligning all derivative contracts to the same expiry date creates a predictable structure

In the vast and complex world of financial markets, success often depends on both strategy and structure. While investors focus on stock prices, interest rates, or economic data, one of market design's most important – yet frequently overlooked – aspects is the expiry date of derivative contracts.

Standardisation enhances clarity, liquidity, and risk control

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Traditionally, all major derivative contracts in markets such as India expire on the last Thursday of each month, from index futures to stock options. This rule may seem arbitrary at first glance, but in reality, it serves a vital function in maintaining market efficiency, fairness and stability.

Aligning all derivative contracts to the same expiry date creates a predictable structure that benefits everyone – traders, brokers, clearing corporations and regulators alike. With a standardised cycle, participants know exactly when positions will be closed, reducing confusion and operational errors. This simplifies trading systems, documentation, and communication across the market ecosystem.

Imagine if different contracts expired on different days of different exchanges. Liquidity would be dispersed throughout the month, leading to lower volumes and higher bid-ask spreads. This would make execution difficult, especially for larger trades.

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Instead, when all expiries occur on the same day, the market sees a surge in trading activity. This concentrated liquidity ensures that traders can enter and exit positions efficiently, and prices reflect real supply and demand dynamics – resulting in better price discovery for everyone.

Synchronized expirations also make risk management much more efficient. Brokers and clearinghouses can accurately calculate margins and obligations, reducing systemic risk. Clearing corporations are better equipped to handle settlements, especially in markets like India where physically settled stock derivatives are common.

For traders and investors, this alignment reduces the potential for risk due to mistimed expirations or unexpected rollovers.

Seamless strategy execution and overall market stability

Many traders and institutional investors apply multi-leg or cross-asset strategies – such as hedging futures positions with options or combining index derivatives with stock derivatives. These strategies depend on timing. If expirations were scattered, it would be difficult to keep positions aligned, increasing risk and reducing the effectiveness of the strategy.

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By keeping all expiries on the same day, these strategies can be executed and closed seamlessly.

The choice of last Thursday is both practical and strategic. It is close enough to the end of the month, which reflects the market behaviour of the entire cycle, and it makes Friday available for clearing and settlement before the weekend. If last Thursday is a trading holiday, expiration simply shifts to the previous working day – another element of predictability that helps traders plan better.

Disrupting this system would create several challenges:
 ● Fragmented liquidity and inefficient pricing
 ● Higher transaction and hedging costs
 ● Increased operational complexity and error risk
 ● Difficulty managing positions and settlements
 ● Increased risk of systemic market stress

Markets thrive on order and predictability, and a fragmented expiration structure would work against both.

While expiration dates may seem like a minor technical detail, they play a fundamental role in the smooth functioning of financial markets. Aligning all derivative contracts to a common expiration date ensures consistency, improves liquidity, simplifies strategy execution, and enhances overall market stability.

In finance, sometimes the rules that don't come to mind are what hold everything together. And in this case, an expiration date every month is one such rule – quietly, efficiently and powerfully doing its job.

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(Views are personal. The author is a techno-legal Expert and risk management advisor, and advocate at the Supreme Court of India)

Published on: Apr 16, 2025 11:10 AM IST
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