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Why Do Futures Contracts Expire

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You always have several variants of shares in case a futures contract expires when trading on the futures market. Understanding how to manage an open futures position before it matures will have a positive impact on the efficiency of your trading. For contracts that can be settled in cash at expiration, you may not need to settle your position earlier – but you can close them before the expiration date if the price aggressively goes against your position. Keep in mind that many brokers charge a fee if you stay until settlement! Rollover refers to the transition from an expiring first-month contract to another another month`s contract. They are postponed to another month in order to avoid costs and obligations related to the execution of contracts. The options offer you the opportunity to exercise your rights. Futures don`t. Long or short of the term contract until its expiry, you will be exercised. For example, a trader who wants to liquidate a short position under two West Texas Intermediate Crude Oil (WTI) oil futures with an expiration date of September would have to buy two futures of the same WTI oil with the same expiration date. The difference between the cost of the first two contracts and the two clearing contracts brings a trader a profit or loss. Let`s say you have 3 long oil contracts on the day of expiration, but you still think that prices will go up.

To illustrate how an expiring futures contract offers flexibility, suppose an equity investor sought exposure to the S&P 500 for the 2020 U.S. presidential election. All the investor would have to do would be to look at the expiration schedule of the 2019 E-mini S&P 500 (ES) futures. With a little care, the investor could identify the next months of desirable futures and open a new position. Similar strategies could also be implemented by looking at the expiration dates of ES options in 2019. An oil producer must sell his oil. You can use futures contracts to do this. This allows them to set a price at which they will sell and then deliver the oil to the buyer when the futures contract expires.

Similarly, a manufacturing company may need oil to make widgets. Since they like to plan ahead and always bring oil every month, they can also use futures contracts. This way, they know in advance what price they will pay for the oil (the price of the futures contract) and they know that they will accept the oil after the contract expires. This is also the reason why most short-term traders leave their forward positions before they expire, as they do not want to physically buy or sell the underlying product. If the trader wants to maintain his position in the underlying product, he can place a trade in another futures contract with a more distant expiration date. If you notice a drastic drop in volume from one day to the next, you are probably approaching the expiration of this futures contract, as most traders have moved on to trading a contract with a more distant expiration date. The flexibility that a futures contract offers is one of the main reasons why many prefer it to futures. A deeper market allows traders to settle a position indirectly well before the expiration date.

Faster turnaround time when unloading an open position reduces risk. This reduction in risk is especially important if prices do not move in favor of the trader. The following section explores the possibilities of closing a location. It is easier to settle the futures contract with cash than to opt for a physical settlement. The merchant only has to pay the difference if he suffers a loss or receives a sum if the contract is profitable. Suppose a trader enters into a long futures contract to buy crude oil for $75. If the spot price at the expiration date is $80, the trader will receive $5 per barrel as a cash settlement. This would translate into a profit of $1,000 * $5 or $5,000 (since each contract includes 1,000 barrels of oil). Compared to the assumption of 1,000 barrels of oil, the settlement of the cash contract is certainly more convenient in this case. The trader can also take a similar approach for contracts with financial instruments such as stocks. When a contract expires, a process called settlement begins.

Settlement is a procedure managed by the exchange to close all open positions in an expiring contract. Traditionally, futures settlement comes in two main forms: most short-term traders terminate their futures positions before the expiration date. This avoids unexpected volatility and the effort of processing contracts. Suppose a long-term position trader wants to hold a term position in the underlying product. In this case, the trader can place a trade in another futures contract with a later expiration date. This is called a roll-over. On the expiry date, all expired open positions will be settled at a price set by the exchange, called the “settlement price”. On Binance, quarterly contracts expire in the next calendar cycle – March, June, September and December. When the current main month`s contract expires, the next contract replaces it as the new contract for the previous month. Suppose the current reference month is the September contracts. After the contracts expire in December, the contracts will be the new reference month. The increase in derivatives trading activity is leading to increased price volatility both in the derivatives market and in its underlying.

In addition, profit taking by short-term traders leads to greater volatility during this period. To avoid unforeseen liabilities related to delivery or financial settlement, it is essential to know the months of a product`s futures contract. Fortunately, you can easily accomplish this task by simply referencing the contract specifications. For example, a trader who holds a long position under four E-mini S&P 500 futures that expire in September must simultaneously sell four E-mini S&P 500 futures contracts with the September expiration date and buy four E-mini S&P 500 futures with the new december expiration date. Futures are derivative financial contracts that require parties to trade an asset at a predetermined future date and price. Here, the buyer must buy or the seller must sell the underlying asset at the set price, regardless of the current market price at the expiration date. This is the actual exchange of the asset for the price agreed in the futures contract. The contractual buyer is required to purchase the asset, while the seller is responsible for the storage/maintenance of the asset and delivery on the expiration date.

For physical commodities (such as oil, wheat), the stock market sets a standard for the underlying commodity. Physical goods must also be stored in certain warehouses, and the buyer has the option of taking them out of the warehouse or keeping them against payment of a storage fee. .

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