When a futures contract expires, one of three things happens to an open position: the seller physically delivers the commodity to the buyer, the two sides settle the price difference in cash, or the trader has already closed or rolled the position before the deadline. Most positions take the third path. Estimates from major exchanges suggest fewer than 5% of physically deliverable contracts actually result in the transfer of goods. Still, understanding what happens when futures contracts expire matters, because the calendar drives pricing, margin, and the very real risk of ending up owning 5,000 bushels of corn you never intended to receive.
Physical Delivery of the Commodity
Futures on tangible commodities like crude oil, gold, and wheat are typically structured as physically deliverable contracts. If you still hold an open position when one of these contracts expires, the legal obligation to transfer actual goods kicks in. The seller must deliver, and the buyer must accept and pay the price locked in when the contract was opened.
Nobody hands over a barrel of oil. The exchange’s clearinghouse moves ownership through documents that represent the commodity sitting in an approved facility. For metals like gold and silver, those documents are warrants, which function as electronic titles under the Uniform Commercial Code.1CME Group. NYMEX/COMEX Chapter 7 Delivery Facilities and Procedures For agricultural products, the exchange uses warehouse receipts, which represent grain already in storage, or shipping certificates, which represent a facility’s commitment to deliver grain on request.2CME Group. Warehouse Receipts vs. Shipping Certificates FAQ The buyer receives the instrument and becomes the legal owner of the commodity.
Every contract specifies the exact quality the seller must deliver. Corn futures, for example, default to No. 2 Yellow corn, with small premiums for higher-grade No. 1 and discounts for lower-grade No. 3. If the delivered commodity is a different grade than the contract standard, the exchange adjusts the final payment up or down based on a published schedule.
One detail catches new traders off guard. The clearinghouse itself has no obligation to make or accept delivery of the actual commodity, and it will not cover losses if a warehouse goes bankrupt or documents turn out to be defective.1CME Group. NYMEX/COMEX Chapter 7 Delivery Facilities and Procedures The clearinghouse matches counterparties and enforces the rules, but the underlying risk of physical delivery falls on the participants.
How Cash Settlement Works
Not every futures contract involves a physical commodity. Index futures like the S&P 500 and interest rate futures settle entirely in cash. On expiration, the clearinghouse compares the price at which you entered the contract to the final settlement price, then credits the winner’s account and debits the loser’s. No goods move, no warehouse receipts change hands.
How that final settlement price is calculated matters more than most traders realize. For S&P 500 and E-mini S&P 500 futures, the exchange uses a Special Opening Quotation, or SOQ, built from the opening price of every component stock in the index on expiration Friday. If a stock does not open that morning, its last sale price is used instead. The SOQ is not finalized until every component stock has opened and any corrections are complete, so the settlement price can differ noticeably from the previous day’s closing value. NASDAQ-100 futures follow a similar process using the NASDAQ Official Opening Price for each component stock.3CME Group. Final Settlement Procedures
First Notice Day and Last Trading Day
Two dates control the expiration timeline for physically deliverable futures, and confusing them is one of the most common mistakes retail traders make.
First notice day is the earliest date on which a long position holder can be assigned a delivery notice.4CME Group. About Listings Once this date arrives, the clearinghouse can match you with a seller who has declared intent to deliver, and you become obligated to accept the commodity and pay for it. If you hold a long position in a physically settled contract and do not want 40,000 pounds of live cattle showing up in your name, you need to be out before first notice day.
Last trading day is the final session in which the contract trades before it expires.4CME Group. About Listings After this date, any remaining open positions must be settled through delivery or cash settlement depending on the contract’s terms. For many agricultural and energy contracts, first notice day falls several days before the last trading day, creating a window where the contract still trades but long holders face delivery risk. Short position holders generally control when delivery occurs, since the seller initiates the process by filing a notice of intent to deliver.
The practical takeaway: treat first notice day as your real deadline for exiting, not last trading day. Many brokers will not even let retail accounts hold positions past first notice day and will liquidate them automatically.
Closing Out Before Expiration
The simplest way to avoid delivery or final settlement is to close the position before either deadline. You do this by entering an offsetting trade. If you originally bought one gold futures contract, you sell one gold contract for the same delivery month. The clearinghouse nets the two positions against each other, canceling your obligation entirely. Your profit or loss is the difference between your entry price and exit price, minus transaction costs.
Timing matters. For physically delivered contracts, offsetting should happen before first notice day to avoid any chance of delivery assignment. Waiting until the final hours of a contract’s life is risky because liquidity tends to dry up as expiration approaches. Wider bid-ask spreads in a thinly traded expiring contract can eat into your returns in ways that feel avoidable in hindsight. Most experienced traders close out well before the deadline, often a week or more ahead of first notice day.
Rolling to a Later Contract
Traders who want to stay exposed to a market but need to exit an expiring contract use a two-step process called rolling. First, you close the expiring front-month contract through an offsetting trade. Then you open a new position in a later-dated back-month contract. Many exchanges offer calendar spread orders that execute both legs simultaneously, reducing the risk of price movement between the two trades.
The price difference between the expiring contract and the next one is where rolling gets expensive or profitable. In a contango market, the later contract trades at a higher price than the front month, so rolling a long position forward costs money. You are selling low and buying high. This drag, called negative roll yield, reflects carrying costs like storage, insurance, and financing for the underlying commodity.5CME Group. What Is Contango and Backwardation
In a backwardated market, the relationship flips. The later contract is cheaper than the expiring one, so rolling forward generates a benefit called positive roll yield. Backwardation often reflects high near-term demand or a convenience yield that comes from actually holding the physical commodity.5CME Group. What Is Contango and Backwardation For long-term commodity investors, the roll yield can matter as much as the underlying price movement. A market stuck in steep contango for months will quietly erode returns even if the spot price holds steady. Each leg of the roll also carries its own transaction costs, and those compound for strategies that roll monthly or quarterly.
Margin and Forced Liquidation Near Expiration
As a contract approaches its delivery window, the exchange typically raises margin requirements. Positions entering the delivery process are assessed a special delivery margin that exceeds the normal initial margin.6CME Group. Margin Requirements for Positions in Delivery A position about to result in physical delivery carries more risk than one with months of trading ahead of it, and the higher margin reflects that. Traders without the capital to meet the new requirement face a margin call.
If you cannot deposit additional funds to cover that call, your broker can liquidate your position without asking permission and without giving you the chance to choose which positions get closed.7National Futures Association. NFA Compliance Rule 2-30(b) Risk Disclosure Statement for Security Futures Contracts If the liquidation does not fully cover the shortfall, you remain on the hook for the remaining balance. This is where expiration risk hits undercapitalized accounts hardest. A trader who ignores a margin call near expiration can find their position closed at the worst possible moment.
The CFTC also imposes tighter speculative position limits during the spot month, the period around delivery. These limits are lower than the ones that apply during the rest of the contract’s life, and they apply separately to physically delivered and cash-settled contracts.8eCFR. 17 CFR 150.2 Federal Speculative Position Limits A trader holding a large position may need to reduce it as expiration approaches, regardless of margin, simply to stay within legal limits.
Price Convergence at Expiration
Near expiration, the futures price and the spot price of the underlying asset converge. Earlier in a contract’s life, the two prices can differ significantly because of storage costs, interest rates, and supply-demand expectations. As the expiration date closes in, that gap narrows toward zero.
Arbitrage forces the convergence. If the futures price trades far above spot near expiration, traders buy the cheaper physical commodity and sell the expensive futures contract, pocketing the difference when the contract settles. That buying pressure on the physical market and selling pressure on the futures market push the two prices together. The same mechanism works in reverse if futures trade below spot. By the time the contract expires, the settlement price and spot price are essentially the same.
Tax Treatment of Futures at Expiration
Futures contracts receive a distinctive tax treatment under federal law that applies whether you close a position, roll it, or let it expire. Regulated futures contracts are classified as Section 1256 contracts, and two rules set them apart from stocks and most other investments.
First, all Section 1256 contracts are marked to market at the end of each tax year. Even if you have not closed a position, the IRS treats it as though you sold it at fair market value on the last business day of the year. Any unrealized gain or loss counts as taxable income for that year.9Office of the Law Revision Counsel. 26 USC 1256 Section 1256 Contracts Marked to Market You cannot defer gains by holding a position open across the calendar year the way you can with stocks.
Second, gains and losses on Section 1256 contracts are split 60/40 between long-term and short-term capital gains, no matter how briefly you held the contract. Sixty percent of any gain or loss is treated as long-term, and 40% as short-term.9Office of the Law Revision Counsel. 26 USC 1256 Section 1256 Contracts Marked to Market Since long-term capital gains rates are lower than short-term rates for most taxpayers, this blended treatment is often more favorable than what stock traders receive on positions held less than a year.
Your broker reports the aggregate gains and losses from regulated futures on Form 1099-B.10Internal Revenue Service. Instructions for Form 1099-B You then report these figures on IRS Form 6781, which calculates the 60/40 split, and the amounts flow onto Schedule D of your tax return.11Internal Revenue Service. Form 6781 Gains and Losses From Section 1256 Contracts and Straddles Futures use an aggregate method rather than the trade-by-trade reporting stock traders are used to, and the mark-to-market rule means you can owe taxes on paper gains you have not actually cashed out.