Navigating futures expiration

Futures expiration is one of the key aspects of a futures contract. Unlike stocks, but similar to options, futures expire. Before expiration, traders can typically close or manage their position. However, after expiration, the contract ceases to exist. The futures exchange where the contract trades decides when each contract will expire. For example, many stock index futures–like the E-mini S&P 500 futures (/ES)–have quarterly expirations (March, June, September, and December). Meanwhile, some energy futures–such as WTI Crude Oil futures (/CL)–have expirations each month.

Having a fixed expiration date serves two purposes. First, it lets both parties to the contract know a specific date when the terms will need to be fulfilled. Second, a fixed expiration date also allows hedgers (i.e. those investors seeking to protect their investments or commodities with futures contracts) to establish a hedge over very specific time frames, such as 1 month, 3 months, or 1 year, for example.

While both options and futures have expiration dates, unlike options, futures contracts aren’t classified as ‘in-’, ‘at-’, or ‘out-of-the-money’ and there’s no such thing as a futures contract ‘expiring worthless’. If a trader were to hold a futures contract to expiration, the contract would either be physically settled or cash settled. Cash settlement is fairly straightforward; while physical settlement involves making or taking delivery of the underlying asset based on the terms laid out in the contract specifications.

To avoid having to actually take delivery of a commodity, physically-settled futures are rarely held to expiration by traders. Rather, they’ll close out their position prior to expiration. At Robinhood, the last day to trade is the day a futures trader must close out their position in order to avoid physical settlement. Nobody wants to wake up to 1,000 barrels of oil in their backyard!

Example 1

Mary has a position in Micro Bitcoin September 2024 futures (/MBTU24). She leaves the position open through the September 20th expiration and it’s subject to final settlement. Because /MBT is cash settled, her account will be credited or debited with cash based on the final settlement price. The final settlement price is determined and calculated by the exchange. For example, if Mary bought /MBTU24 when it was 55,000 and the final settlement price is 56,000, she’ll be credited $100 because each /MBT represents 0.10 Bitcoin (1,000 x 0.10 = $100).

Example 2

John has a long position of 1 June Gold futures contract (/GCM24) and was informed by his broker on May 29th that it’s the last day to trade /GCM24 and he needs to close the position, roll to a later month, or the broker will close it on his behalf. When asked why, John is told that gold futures are physically-settled and his futures account can’t accept delivery of the actual commodity. After the last day to trade, a party who is short the same futures contract can request John take delivery. However, since gold can’t be physically delivered to his account, the position in the futures contract is closed on or prior to the last day to trade.

Because a futures contract is an agreement between 2 parties to buy or sell an underlying commodity or financial instrument at a specific time, it must eventually be settled and the goods will change hands–unless it’s closed before the expiration. If a futures contract isn’t closed before expiration, it will be subject to 1 of 2 types of settlement: cash or physical delivery.

Physical delivery facilitates the transfer of the actual commodity from seller to buyer based on the specifications of the futures contract. Futures that are tied to commodities like crude oil or gold involve the transfer of the physical commodity at expiration (barrels of crude and ounces of gold). Many futures brokers, including Robinhood Derivatives, don't facilitate physical delivery of futures contracts. Therefore, you’re required to close or roll any open futures position by the last day to trade. If you fail to close your position prior to the last day to trade, Robinhood Derivatives will close the position to avoid physical delivery of the contract.

Cash settlement doesn’t facilitate physical delivery of a futures contract. Rather, when the futures contract reaches its expiration, cash is credited or debited from your account based on the final settlement price. At expiration, a final settlement price is calculated by the exchange, and each trader that has a position (long or short) is either credited or debited based on the difference between the final settlement price and their opening trade price.

On the Robinhood app, you’ll see an item called “last day to trade”. Last day to trade is the final day you’re able to close a particular futures contract as a Robinhood Derivatives customer. For cash-settled futures, the last day to trade is the expiration date.

For some physically settled futures, the last day to trade can vary based on the product. Generally, it occurs sometime before the first notice date (FND), which is the initial date on which the seller of a futures contract can notify the buyer of the intent to deliver the underlying asset. This means, you may not be able to open a futures position in that particular contract for a brief period prior to the ‘last day to trade’ as listed in the app. Instead, most traders will look to the next active contract and establish a position there instead.

Options also have expiration dates, but the settlement process is different than with futures. Standard stock options represent the right to buy or sell 100 shares of stock per contract. At expiration, shares and cash change hands depending on whether the contract is exercised. Often, this happens if the contract is in the money (ITM). If the option expires out of the money (OTM) the option ceases to exist and the option seller keeps the premium.

However, futures represent an agreement between a buyer and seller to transact at a future date for a specific price. There’s no right, or option, to do so. Therefore, concepts like moneyness and exercise and assignment aren’t applicable. If a trader carries a futures contract into expiration, they will be subject to the specified settlement process. As explained above, with physical settlement, many traders want to avoid this process, and at Robinhood Derivatives, physical delivery isn’t supported.

Rather than closing a position at expiration, a trader can choose to roll it instead. In futures, a roll is the simultaneous closing of an expiring contract and the opening of a similar position in a later month. For example, a trader that is long 5 crude oil futures contracts that are expiring in March might sell those and open a new similar position, buying 5 contracts in the next available month, April. By doing this, they’ll realize their profit or loss in the March contract and establish a new position in the April contract. Note that, when rolling, commissions and fees apply to both the opening and closing of futures positions.

Just like the milk in your refrigerator, it’s important to understand when a futures contract will expire. The expiration date determines the last day to trade before settlement. Keep in mind, the last day to trade might be before the expiration date on some futures; be aware of the expiration dates and other contract specifications before opening a position.