What happens if you are still holding the contract at expiry?

There is a story that circulates about the trader who forgot to close his crude position and had a tanker delivered to his driveway. It is a myth in its details and completely true in its mechanics — and the mechanics are what make futures prices behave.

Physical delivery

Crude, corn, gold, copper, live cattle: these contracts genuinely oblige delivery. Real barrels at Cushing, real bushels into an approved elevator, real bars in an approved vault. The process runs on a calendar published years in advance:

• First notice day — the first date on which a short can serve notice of intent to deliver. From this day, a long holder can be assigned.
• Last trading day — after which the contract no longer trades.
• Delivery period — when the physical transfer actually happens.

In practice, brokers keep non-commercial accounts nowhere near this. House rules force-liquidate positions in physically-delivered contracts several days before first notice day. So the tanker never arrives — but note carefully what does happen: your position is closed for you, at whatever the market offers that morning, on someone else's timetable. That is its own category of risk, and it is far more common than delivery.

Cash settlement

Index futures, short-term interest-rate futures, volatility futures: there is nothing deliverable. (Treasury note and bond futures are the interest-rate exception — those do deliver a bond.) You cannot hand someone the S&P 500. These contracts settle against a final settlement price computed by a defined, published procedure — for equity index futures, typically a special opening quotation built from the opening prices of the index constituents.

Cash-settled contracts expire quietly. The last variation-margin payment lands and the position simply ceases to exist. No notices, no elevators, no vaults.

Quietly, and early. For an index future the final settlement is computed from the constituents' opening prices on the last day, and trading in the expiring contract stops at that opening bell: on the CME E-mini S&P 500 the last trade is at 9:30 a.m. New York time on the third Friday of the contract month. A holder who plans to close on expiry Friday finds there is no session to close in; the last chance was Thursday's close or the overnight session, and the gap from Thursday's close to the Friday opening prints is theirs. Read the termination-of-trading line on the spec sheet, not only the settlement date.

Why delivery matters even though almost nobody delivers

Only a small minority of contracts ever go to delivery. The overwhelming majority are closed out or rolled beforehand. But the possibility of delivery is the anchor. Because someone could buy the future, take delivery and sell the physical, the futures price cannot drift far from the cash price as expiry approaches. Remove deliverability and the anchor has to be written into the rulebook instead — which is exactly what a cash-settled contract's final settlement procedure is for. Unit 3 turns this into precise arithmetic under the name convergence.

Rolling — a preview of the most important idea in the course

Anyone who wants exposure lasting longer than one contract must roll: close the expiring contract, open the next one. It is two trades, and the price difference between them is not administrative noise.

Illustratively: the front-month crude contract expires at $80.00 and the next month trades at $81.50. You roll one contract — sell the front at $80.00, buy the deferred at $81.50. No profit or loss is booked today on the closed leg. But your new position's entry price is $1.50 higher than the market you just left. That is $1,500 per contract of ground to make up, and you will do this again next month, and the month after.

The 2020 illustration

In April 2020 the expiring WTI contract settled below zero. Storage at Cushing was full, nobody wanted the barrels, and holding physical crude briefly had negative value. It was extreme and it was the delivery mechanism speaking clearly: a futures contract is not an abstraction, it is a claim on a physical thing that someone must actually store.

Try it now

1. Five years of continuous natural gas futures is below, with a fund that holds those futures and rolls them beneath it. Measure both across the same five years.

2. They diverge, sometimes dramatically. Write the two percentages side by side and subtract. Nobody made a bad call to produce that gap; the fund simply could not take delivery, so it sold every expiring contract and bought a later one, every month, for five years.
3. You have just seen the roll in a chart, before doing any of the arithmetic. Unit 3 explains exactly where that gap came from.