How Commodity Futures Contracts Expire

A commodity futures contract expires on a contractually specified date, at which point the position must be closed, rolled forward to a later contract month, or settled—either through physical delivery of the underlying commodity or through cash payment based on the final market price. Most traders and funds roll their positions well before expiry, but understanding what happens at expiration is essential for managing risk and avoiding unwanted delivery obligations.

The two settlement methods

Physical delivery: For contracts like crude oil, gold, corn, natural gas, and agricultural commodities, physical delivery is the formal method of settlement. The short (seller) is obligated to deliver a specified quantity and grade of the commodity to an approved warehouse or delivery point. The long (buyer) receives the commodity and is responsible for taking possession or arranging logistics. Delivery is intended to tie the futures price to the spot rate of the physical commodity and prevent manipulation.

Cash settlement: Some contracts, especially those on financial indices or those where physical delivery is impractical, are settled in cash. The exchange calculates the final settlement price (usually based on the last trading day’s closing price or an average of the final days), and the holder’s account is credited or debited the difference between the contract price and settlement price, multiplied by the contract size. Equity index futures, currency futures, and certain energy contracts use cash settlement.

The last trading day

The last trading day is the final day on which new futures positions can be opened or existing positions can be closed by selling or buying in the market. After this day, the contract is no longer traded on the exchange. The last trading day typically falls 2–10 business days before the official delivery date, depending on the commodity.

For example:

• Crude oil (NYMEX WTI): Last trading is generally the third business day before the month’s end.
• Corn and soybeans (CBOT): Last trading is typically the business day before the 15th of the expiration month.
• Gold (COMEX): Last trading is generally the third-to-last business day of the contract month.

Anyone still holding a position after the last trading day is locked in—they cannot exit via the market and must either accept delivery (if long) or make delivery (if short), or wait for cash settlement.

The delivery process

When physical delivery occurs, the short (seller) must:

1. Notify the exchange of intent to deliver.
2. Present the commodity at an approved warehouse or location that the exchange designates.
3. Provide a delivery notice with details of the grade, quantity, and location.
4. The exchange then assigns the long (buyer) to receive the delivery notice.

The long (buyer) then:

1. Receives the delivery notice.
2. Pays the agreed-upon futures price (established at the time the contract was entered).
3. Takes possession of the commodity.

Delivery costs (warehouse fees, transport, insurance) are typically the responsibility of the long, though the precise allocation is specified in the contract specifications. This structure is why holding a long position into expiration can be costly and risky—it binds the holder to taking physical possession at a location determined by the exchange, even if logistically inconvenient.

Why most traders roll before expiry

The vast majority of futures traders never intend to take or make physical delivery. Instead, they roll their positions—that is, they close the expiring contract and simultaneously open a new contract for a later month at the current bid-ask spread. A trader holding 10 crude oil futures for December would sell those December contracts on, say, December 1st, and buy an equal number of January contracts on the same day.

Rolling has several advantages:

• No delivery logistics: The trader avoids the hassle and cost of arranging warehouse or pipeline delivery.
• Continued market exposure: Rolling keeps the trader’s exposure to the underlying commodity’s price.
• Flexibility: The trader can exit entirely or hold a different number of contracts in the new month.
• Predictability: Rolling prices are transparent and actively traded.

Traders typically roll 2–5 business days before the last trading day, during the highest-volume trading in the nearby contract months. This timing minimizes the bid-ask spread and ensures smooth execution.

Contango, backwardation, and roll costs

When rolling, a trader pays the difference between the expiring contract price and the new contract price. This difference depends on the contango or backwardation structure of the market.

• In contango: Farther-out contracts trade at a premium to the nearby month. A trader rolling from December to January will sell December at a lower price and buy January at a higher price, incurring a loss.
• In backwardation: Farther-out contracts trade at a discount. Rolling results in a gain (the trader sells at a higher price and buys at a lower price).

Over time, repeated rolling in contango gradually bleeds capital, while rolling in backwardation generates gains. This is particularly relevant for leveraged ETFs and other funds that mechanically roll futures—they may face significant drag in a steep contango environment.

Forced settlement and margin risk

If a trader fails to roll or close a position before the last trading day, they are exposed to either physical delivery (if long) or delivery obligations (if short). More immediately, they face margin risk: the exchange may require additional collateral if the position moves sharply against them, and they could face forced liquidation if they do not post it.

For those holding short positions who cannot make delivery (e.g., a speculator with no intention to produce the commodity), forced liquidation or default is possible. Exchanges have rules and procedures to manage this, but the outcome is usually painful losses.

Settlement prices and basis risk

On the final settlement date, the exchange sets a settlement price, often based on the last trade of the last trading day or an average of the final minutes of trading. This price is used to calculate final profit and loss for cash-settled contracts and to set the delivery price for physically settled contracts.

The settlement price is rarely the same as the spot rate of the actual commodity. The difference is called the basis, and basis risk is a real concern for hedgers. A farmer hedging next year’s corn crop by selling December futures will realize the futures profit or loss at expiry based on the settlement price, not the eventual cash price received at harvest.

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