Futures and options expiration-day effects: The Indian evidence

Abstract

VIPULThis study examines the effect of expiration of options and futures on price, volatility, and volume of the underlying shares. The values of these variables 1 day prior to expiration, on the day of expiration, and 1 day subsequent to expiration are compared with those 1 and 2 weeks before and after the corresponding day with the use of the Wilcoxon matched-pairs signed-ranks test. The underlying share prices tend to get marginally depressed a day prior to expiration and to strengthen significantly a day after the expiration. The rate of increase of returns on the day after the expiration is abnormally high. An abnormally high volume is also observed on the expiration day; it starts building up a day prior to expiration and continues into the following day for shares with relatively high derivative volumes. These effects can be largely ascribed to arbitrage activities and the restriction on short sales in the Indian cash market.

Witching Days and Abnormal Profits in the US Stock Market

“…Chow et al (2003) could not identify any such effects in the Hong Kong stock market. Edwards (1988), Arago and Fernandez (2002), Vipul (2005), and Gurgul and Suliga (2020) all detected higher price volatility of futures contracts near expiration. By contrast, Schlag (1996) and Bollen and Whaley (1999) could not obtain such evidence for the German stock market and the Hong Kong Futures Exchange respectively.…”

“…Pope and Yadav (1992) found negative returns as well as higher trading volumes on expiration days in the UK stock market, whilst Stoll and Whaley (1997) and Hsieh (2009) provided evidence of price reversals in the Australian and Taiwanese stock markets. Vipul (2005) found that the underlying assets tend to exhibit negative returns the day before expiration, but significant reversal happens on the next trading day. Y.F.…”

The Impact of Maturity on Futures and Options with Reference to National Stock Exchange: An Exploratory Study

“…Kamaiah and Sakthivel [13] investigated the impact of stock futures expiration on the spot market in the NSE and observed positive abnormal returns and volumes on days before the expiry day. Vipul [14] analyzed the expiry day impact in the Indian stock market. 14 equity shares of different sectors were considered for the study and it found that share prices have fallen the day before the expiration day and has risen significantly the day after the expiration day.…”

Performance of the Heston’s Stochastic Volatility Model: A Study in Indian Index Options Market

“…Such options are therefore excluded from the study. Similarly, options with less than two days to maturity are removed as their prices may get distorted due to the expiration day effects [27].…”