Expiration is the end of a futures contract on the stock, currency, cryptocurrency or commodity market. Expiration is the moment when final settlements are made between the participants in the transaction, and the main obligation is fulfilled. When it comes to expiration, there is a lot of volatility in the market, which can increase the risk for investors. 馃
What is futures expiration? The validity of futures contracts is limited: it expires in accordance with a certain calendar cycle. The expiration of quarterly contracts is characterized by the following calendar cycle: March, June, September and December. When the current frontal month contract expires, the next contract replaces it, acting as a new frontal month contract. Let's assume that the September contracts are front month contracts. As a result of expiration, December contracts will become front month contracts. After the expiration of the contract, the settlement process takes place.
The settlement implies the procedure for the exchange to close all open positions under the expiring contract. Traditionally, there are two main categories of futures according to the form of calculation: 鈻笍 Deliverable: the buyer must purchase and the seller must sell a set amount of the underlying asset. 鈻笍Settlement: the financial balance of the parties changes depending on how much the bidder earned or lost. For example, all contracts on Binance are settled. This means that there is no exchange of underlying crypto assets.
Once the futures are settled, the wallet balance is updated according to the settlement PnL. On the day of expiration, all open positions with an expired validity period are settled at the settlement price set by the exchange.
馃挱What can traders do on futures expiration day? Before the expiration date, the trader has several options: 鈻笍Close the position before expiration; 鈻笍Go to the next contract after the current nearest contract expires; 鈻笍Allow the contract to expire with subsequent settlement.
馃挱How does futures expiration affect the price of bitcoin? Expiration dates for large derivatives markets, such as stock options or commodity futures, tend to increase the volume and volatility of the underlying asset as traders rebalance or exit positions. The growth of trading activity on derivative contracts leads to increased price volatility both in the derivatives market and for the underlying asset. In addition, during this period, volatility increases due to the profit taking by short-term traders. As a result, the underlying asset is affected by the spillover effect, and volatility is growing in the derivatives market in anticipation of expiration.
鉂楋笍Expiration and settlement dates can have a significant impact on the trading of both hedgers and speculators. Therefore, it is important to understand all the features of these phenomena. Before you start trading futures, be sure to study the specification of the contract and your obligations.