Futures and options expiration-day effects: The Indian evidence

This 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.