Physical Delivery vs. Cash Settlement

Futures contracts are either cash settled or physically delivered. Futures contracts that are physically delivered require the holder to either produce the commodity or take delivery from the exchange. Futures contracts that are cash settled are not deliverable and a simple debit or credit is issued when the contract expires.

Cash Settlement: At the end of the contract the holder of the position is simply debited or credited the difference between their entry price and the final settlement. If you are long the Emini S&P 500 from 1700.00 and when the contract expires, the final settlement is 1705.00, you are up 5.00 points, which is $250. On your statement the long Emini S&P position is offset from the settlement and your account is credited with a $250 gain.

While traders who are in Cash Settled contracts are not a risk for delivery, they should understand when the contracts come off the board. If a trader is long the Emini S&P 500, and wants to continue holding that position, it is best to roll the position before expiration.

Popular cash settled contracts at the CME Group are the Emini S&P 500, Emini NASDAQ, Emini DOW, Lean Hogs and Feeder Cattle. Popular cash settled contracts at the ICE exchange are the Mini Russell 2000, WTI Crude Oil and Natural Gas. Brent Crude Oil is physical delivered but it has an option to cash settle.

Physical Delivery: At the end of the contract the holder of the position will either have to deliver the physical commodity if short or take delivery if long. It is estimated that only 2% of all futures contracts are actually delivered. All Physically Delivered contracts have both a First Notice Day and a Last Trading Day. Most brokers, if not all, will notify traders if they are in a contract and First Notice Day is approaching.

If a trader wants to deliver or take delivery of a commodity, they will coordinate with their broker, the clearing firm and the exchange in order to do so. If the trader does not want to take delivery, they can “retender.”

Retender: If a trader is long and assigned delivery, they may elect to “retender” the commodity. They will also have to sell the futures contract. When the retender process is complete, the assigned delivery will offset with the short futures contract. The exchange will typically chart a fee for retendering, which is usually $100 per contract or more.

Popular Physical Delivery futures contracts include (but are not limited to) CME Currencies (Euro, JPY, & GPB), CBOT Treasuries (2 yr, 5yr, 10 yr, & 30 yr), NYMEX Energies (Crude Oil, Natural Gas, RBOB Gasoline, & Heating Oil), CME Live Cattle, CBOT Grains (Corn, Wheat, Soybeans, Soybean Meal, Soybean Oil, Rice, and Oats), COMEX Metals (Gold, Silver, & Copper), and ICE Softs (Sugar, Cotton, Cocoa, Coffee and OJ).

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This material is conveyed as a solicitation for entering into a derivatives transaction.

This material has been prepared by a Daniels Trading broker who provides research market commentary and trade recommendations as part of his or her solicitation for accounts and solicitation for trades; however, Daniels Trading does not maintain a research department as defined in CFTC Rule 1.71. Daniels Trading, its principals, brokers and employees may trade in derivatives for their own accounts or for the accounts of others. Due to various factors (such as risk tolerance, margin requirements, trading objectives, short term vs. long term strategies, technical vs. fundamental market analysis, and other factors) such trading may result in the initiation or liquidation of positions that are different from or contrary to the opinions and recommendations contained therein.

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