Expiration, in the context of crypto derivatives, specifically options and futures contracts, signifies the pre-determined date and precise time at which a contract ceases to be active or tradable. At this juncture, the contract’s terms dictate the method of settlement, whether into the underlying cryptocurrency asset or its cash equivalent, and the final price used for this settlement. This concept is fundamental for managing risk and execution in institutional crypto options trading.
Mechanism
Upon reaching the stipulated expiration time, the contract’s embedded settlement logic is activated. For options, this typically entails automatic exercise if the contract holds intrinsic value (in-the-money), or it lapses if it does not, based on a designated reference price. Futures contracts generally proceed to either cash settlement or physical delivery of the underlying crypto asset, as specified by the respective exchange rules.
Methodology
The strategic approach to managing expiration involves diligent monitoring of contract valuation and open interest as the expiration date nears. Traders must determine whether to close the position, roll it over into a new contract with a later date, or permit it to settle according to its terms. This methodology is central to derivatives trading, influencing decisions on position sizing, risk assessment, and capital allocation to optimize outcomes and avoid unintended automatic settlements.
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