Derivatives trading is an integral part of the maturing process of capital market of every nation. Derivatives were introduced as a risk management tool in the financial market. Since, its very inception in 1865 on Chicago Board of Trade, policy makers and regulators were concerned about its impact on the underlying stock market. Most of them were of the belief that futures trading attracts speculators and arbitrageurs who destabilize the spot prices, especially on the expiration day of these derivatives contracts. In this paper, an attempt has been made to analyze the effect of expiration of stock derivatives on the volatility, return and trading volume of underlying individual stocks listed on National Stock Exchange (NSE). The results from the sample period show the presence of an abnormally high volume on expiration day, thereby suggesting that arbitrage and manipulating activities take place in the market and that positions are unwound at the expiration. Hence, there is a greater volatility in the market on the expiration day. However, the unwinding of arbitrage positions failed to cause any significant price distortion at expiration, as there is no significant change in the return on stocks on the expiration day.

The concern over how trading in futures contracts affects the spot market for underlying assets has ever been an interesting subject for investors, market makers, academicians and regulators alike. Ever since 1865 when for the first time commodity futures were introduced on the Chicago Board of Trade, policy makers and regulators in these markets showed serious concern about the impact of futures on the underlying cash market. Most of them were of the belief that futures trading attract speculators who then destabilize spot prices. Existence of futures contracts in any market is expected to provide the investors in spot (cash) markets, with low cost means of hedging risk. Yet over the years, especially with the experience in financial derivative instruments, there seems to be some concern for the undesirable impact of these contracts on spot markets. The desirability of such derivative instruments was also questioned at the time of its introduction in Indian market. Among the effects of derivatives contracts on underlying markets, the expiration day effect is an important one. The expiration day is the day on which the derivatives contracts get expired.

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