An expiration date in the cryptocurrency context is the predetermined date and time when a derivative contract matures. This could be an options contract, futures contract, or perpetual swap.
On this date, the contract becomes invalid or is settled. After expiration, traders cannot exercise or trade the contract. Any obligations must be fulfilled as per the contract terms.
Crypto options give traders the right, but not the obligation, to buy (call) or sell (put) an asset at a specified price before or on the expiration date. After expiration, these contracts are either settled in cash or physically delivered, based on the exchange's terms.
Crypto futures have a fixed expiration date. At this point, the contract settles physically, with asset delivery, or in cash. Traders can roll over to a new contract to maintain exposure beyond expiration.
Unlike traditional futures, perpetual contracts do not have an expiration date. They use a funding mechanism to align prices with the spot market.
As expiration dates approach, increased volatility can occur, a phenomenon known as "expiration effects." Traders adjust their positions, which can influence price movements. Large open interest at specific expiration dates may affect the market as institutional traders close or roll over their positions.
Traders use expiration dates to manage portfolio risks. They implement hedging strategies to mitigate potential losses as contracts near maturity.
Institutions monitor expiration schedules to allocate liquidity effectively. This helps them meet obligations and seize trading opportunities.
Price differences before expiration create arbitrage possibilities. Traders can exploit pricing inefficiencies between different contracts or exchanges.
To offset a position, traders make an opposite and equal transaction of their current position. This allows them to realize profits or losses without taking the contract to final settlement.
Traders can hold their contracts until expiration. The contracts are settled in cash based on the final settlement price. This approach realizes gains or losses based on the underlying asset’s price movement.
Rolling over involves extending a position from one expiration date to a future date, maintaining continuous exposure to the contract. Typically, a calendar spread is used for this purpose.
Understanding expiration dates is crucial for effective trading strategies and managing risk in cryptocurrency markets. It allows traders to decide when to enter or exit positions and adjust their strategies according to market conditions.