When trading derivative futures on physical assets such as oil, gold, cotton, or soybeans, you should be familiar with several unique concepts compared to trading cash-settled contracts.
Cash settlement vs physical delivery
All futures contracts are settled in cash or physically delivered. When cash-settled futures such as E-mini stock index futures expire, a simple debit or credit is issued. However, physically delivered contracts like gold, oil, or soybeans technically require the investor to produce or receive the underlying commodity at expiration.
Although physical delivery of a commodity is possible, it is generally not permitted by the Futures Commission Trader (FCM) without first making the necessary arrangements, such as adequate storage facilities and the ability to purchase the entire contract.
Additionally, meeting these forward delivery requirements is often unrealistic for retail traders, so traders avoid delivery by rolling over their positions.
Although NinjaTrader Brokerage strongly discourages product delivery, clients should contact the Trade Desk to discuss delivery terms at least 30 days prior to the first notification date.
First notice and last transaction date
Traders of physically deliverable futures should also note the following dates 2:
- Date of first notice : the first day the exchange can assign physical delivery to futures contract investors.
- last day of transaction: the last trading day of a futures contract before delivery of the underlying asset.
Trading in physical commodities is prohibited from the business day preceding the earlier of the two preceding dates until the last trading date. These dates vary by contract and can be viewed on the relevant exchange’s website.
Traders holding positions or placing orders for such contracts during this period are subject to immediate liquidation and associated margin violation fees. It is the responsibility of the individual trader to avoid these fees by offsetting or rolling over open positions before the contract expires.
Learn how to roll futures on NinjaTrader in this one-minute video:
Physical commodities, such as crude oil, differ from stock prices in that the underlying deliverable is a physical entity that must be shipped and stored, unlike equity futures, which are a fully electronic and settled transaction. cash. . Therefore, the cost of shipping and storing the product should be factored into the futures price, known as cost. transport .
Although you can buy a barrel of crude for a penny, it might cost you $10 a barrel to store it for a month in your warehouse and another $10 to ship it, so the actual cost is $20. This is why the last months of the contract tend to trade at higher prices than the first month contract.
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