Book profits at event settlement

Book profits at event settlement

In this article, we’ll cover what ‘Event Expiry’ means and whether you should book your profits or wait for the event to settle.

Derivatives

A derivative is a contract between two parties. The value or price of this contract is “derived" from an underlying asset. The most common types of derivatives are futures, options, forwards and swaps.

At Tradex, the underlying asset is information and the derivative is Events.

Event derivatives are contracts speculating on the outcome of a particular event, such as a major election, the daily range of stocks on NASDAQ, the weather or even a sports match. Event derivatives have only two outcomes, paying either 100 percent (if you predict the outcome correctly) or zero (if you are wrong).

Event Expiry

An investor agrees to buy or sell the underlying assets (stocks, in this case) at a fixed price at a future date. Now, for a Futures contract, the buyer has to fulfil the agreement at all costs. This future date by which the contracts have to be fulfilled is called the derivatives expiry.

When it comes to Event derivatives, the expiry date is defined by the settlement source rather than the exchange and hence it is directly linked to the event result date itself. If the event you were trading on was “Will BJP win the UP elections?”, then the expiry date would be set before the actual poll results come out.

Let’s assume that our traders are optimistic about an event. So, the volume of 'Yes' contracts increases in comparison with the ‘No’ contracts. Looking at this, other traders on Tradex could start buying shares in anticipation of higher prices. When this buying increases in large quantities, the contract price also rises.

Sometimes, when the price of Yes or No is increasing due to related trending occurrences that can alter or expedite the prediction, the trade event hits polarity, i.e. either the value of Yes or the value of No reaches ~99.99 INR.

Between the increase in the price of your purchased shares and the chances of the event ending up in your favour, you get to choose whether you want to book your profits early by selling your stake or wait for the event to settle on the expiry date to collect the payout for owning the correct shares.

Note: Once an event expires, you can neither book profits anymore, nor cut your losses. Participation in any particular event contract ends the moment it expires, either by date or polarity.