Every futures contract has an end date, and something has to happen when it arrives. For some contracts, that means real goods changing hands: barrels of oil, bars of gold or tonnes of wheat. For others, it simply means money moving between accounts. Knowing which type you are trading, and what happens near expiry, is one of those details that seems minor until it suddenly is not.
What a futures contract promises
A futures contract is an agreement to buy or sell a set quantity of something at a set price on a future date. Our guide to contract size in futures explains how much each contract represents. Most traders never intend to hold a contract to the end. They buy and sell before expiry to profit from price moves or to hedge. But the way a contract settles still shapes how it trades.
Physical delivery
A physically settled contract ends with actual delivery of the underlying asset. Someone holding a long position at expiry must take delivery and pay, and someone holding a short position must deliver. US crude oil futures traded in New York are a well-known example, with delivery at a storage hub in Oklahoma. Many metal and agricultural contracts work the same way.
This keeps the futures price closely tied to the physical market, because traders who can actually store or supply the goods will step in if prices drift too far apart.
Cash settlement
A cash-settled contract ends with a payment instead of delivery. At expiry, the contract is marked against an agreed reference price, and the difference is paid in cash. Stock index futures, such as those on the FTSE 100 or S&P 500, are cash settled, because you cannot deliver an index. Brent crude futures are also settled mainly in cash against an index, although they can be exchanged for physical cargoes.
Why the difference matters near expiry
For physically settled contracts, the final days can be unusually volatile. Traders who do not want delivery must close or roll their positions, and if storage is full or demand collapses, prices can behave strangely. In April 2020, US crude futures briefly traded below zero because holders had nowhere to put the oil and paid others to take contracts off their hands.
Cash-settled contracts avoid delivery headaches, but they can still see sharp moves around the settlement price, especially when many contracts expire together, such as on quad witching days.
Rolling a position
Traders who want to keep exposure beyond expiry roll it over by closing the near contract and opening a later one. The price difference between the two reflects storage, interest and supply conditions, which is where contango and backwardation come in. Rolling has costs, and in some markets those costs can add up over time.
What this means for retail traders
Most retail traders access commodities through CFDs or spread bets rather than exchange futures. Many of these products are based on futures prices and automatically roll or expire, so the settlement details still affect pricing. Check your provider’s expiry dates and rollover rules.
The beginner takeaway
Before trading any futures-based product, know how it ends and when. That simple check can keep you out of the most chaotic days in the contract’s life. For today’s commodity picture, this morning’s Morning Market Brief has the latest. If you want to understand your own approach to risk, the free Samuel & Co Trading Trader Assessment is a good place to start.
