How do you handle futures trading when contracts expire? (2024)

Futures expiration is the date when a futures contract ceases to exist and the final settlement price is determined. Depending on the type of contract, the settlement price may be based on the spot price, the average price, or a specific formula. The settlement price is used to calculate the profit or loss of the traders who hold the contract at expiration. Futures expiration dates vary depending on the contract specifications, but they usually occur on a monthly, quarterly, or yearly basis.

There are three main options for handling futures expiration: closing, rolling, or taking delivery. Closing means selling or buying back your contract before it expires, and locking in your profit or loss. Rolling means switching your contract to a later expiration date, and extending your position. Taking delivery means accepting or delivering the underlying asset of the contract, and fulfilling your obligation.

Closing is the simplest and most common option for handling futures expiration. It allows you to exit your position without any hassle or risk of delivery. However, closing also means that you will incur transaction costs, such as commissions and fees, and that you will miss out on any potential price movements after expiration. Additionally, closing may not be possible if the market is illiquid or volatile, or if the contract is subject to price limits.

Rolling is the option for traders who want to maintain their exposure to the underlying asset beyond the expiration date. It allows you to avoid delivery and continue to benefit from any price trends or opportunities. However, rolling also involves transaction costs, as well as the risk of basis risk. Basis risk is the difference between the prices of the contracts with different expiration dates, which may be positive or negative depending on the market conditions. Rolling may also affect your margin requirements and leverage.

Taking delivery is the option for traders who want to physically own or sell the underlying asset of the contract. It allows you to avoid transaction costs and basis risk, and to hedge your exposure to the spot market. However, taking delivery also involves logistical costs, such as storage, transportation, insurance, and taxes, as well as the risk of delivery failure or default. Taking delivery may also limit your flexibility and liquidity, as you will have to deal with the actual asset rather than the contract.

The best option for handling futures expiration depends on your trading objectives, preferences, and resources. You should consider factors such as your profit or loss, your market outlook, your risk tolerance, your available capital, and your contract specifications. You should also monitor the market conditions, the contract prices, and the expiration dates closely, and plan your exit strategy ahead of time. Ultimately, you should choose the option that suits your trading style and goals, and that minimizes your costs and risks.

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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