The futures expiration day is when a futures contract will cease to exist. Holding a contract past this expiration date will trigger obligations for you to purchase the underlying asset.
Options provide you the option to exercise your rights. Futures do not. Long or short the futures contract into expiry you will be exercised.
S&P 500 (ES) Example
Your obligation varies on the type of futures contract you are trading.
The first step is to look up your futures contract on the CME website here.
Let’s look for an example of the SP500 index futures. The symbol is ES, and here are the contract specs.
When you look at the settlement method, it shows “financially settled”.
What does this mean?
It means that on the day of expiry the open position becomes crystallized.
If you had a profit of $500, on expiry day you will be paid that profit “financially” and your open position is closed.
Oil (CL) Example
If you trade the oil futures, you can find yourself in a little more trouble on expiry day.
You decide to look up the oil futures contract specifications on the CME website here.
The first thing you notice is that each futures contract is for 1,000 barrels of oil.
Then you find out that the “settlement method” is “deliverable” and not financially settled.
In anticipation of a move higher, you are long 3 crude oil futures contracts.
On expiry day you are sent a delivery notice.
You officially own 1,000 barrels of West Texas crude oil for each contract. Since you have 3 contracts, that is a grand total of 3,000 barrels.
But does this mean that you will receive 3,000 barrels of oil in your front yard?
A delivery notice goes out and will tell you that you can pick up your crude oil at any pipeline or storage facility in Cushing, Oklahoma.
While you are the owner, you are also assessed storage and facility costs.
You will then have to sell those barrels, or short 3 crude oil contracts and hold into expiry once again to offset the position.
Or will you?
Talk to Your Broker
In the end, it is your responsibility as a trader to know what happens with your futures contracts on expiry.
You can call your broker and ask them the very same question.
Some brokers will sell your contracts on the final day to avoid the expiry scenario.
Other brokers will send you the delivery notice without any heads up.
This might sound scary to you.
To avoid these headaches there is one simple course of action.
How to Avoid the Headache
If you don’t want to go through the hassle of assignment, you can just make sure to close your positions before expiry.
Assuming you hold 3 contracts, you can sell them and take profit (or loss). If you are short 3, buy them back to cover.
The truth is that over 99% of futures contracts are actually offset before expiry.
Very few traders care to take possession of the asset because the profit or loss is realized regardless of asset ownership.
Only farmers and niche businesses take delivery as part of their business models.
Roll it Forward
Let’s assume you are long 3 oil contracts on expiry day but still think prices will increase.
You can sell the contracts expiring (called front month), take the cash proceeds and buy a further out expiration.
This extension of your trade is known as a roll.
All of this activity by traders, institutions, producers, and processors is what creates the insane volatility on the expiration date. Be careful.
Learn more about futures contract rollover and why it can get very volatile.
That’s it, expiry is not that scary – if you don’t let yourself experience it.
If you are going to trade futures, make sure you understand each contract and your obligations.
The best surprise is no surprise in trading.
Good luck and good trading.
You can also learn about our institutional-grade day trading package here, or learn to trade a more passive options strategy in our package here.
The information contained in this post is solely for educational purposes and does not constitute investment advice. The risk of trading in securities markets can be substantial. You should carefully consider if engaging in such activity is suitable for your own financial situation. TRADEPRO Academy is not responsible for any liabilities arising as a result of your market involvement or individual trade activities.