Deep Dive · Futures · Lesson 8
Settlement:
Physical vs Cash
Big Idea
Every futures contract ends one of two ways. Either the actual asset changes hands — physical delivery — or only the cash difference is paid — cash settlement. Which one applies is fixed by the contract’s specification, not chosen by you at the last minute.
- Physical delivery = the real asset is delivered and paid for.
- Cash settlement = only the price difference is settled in cash.
Crucially, most traders never go to delivery — they close or roll the contract before it expires.
Two Ways a Contract Ends
When a contract reaches expiry it must resolve. Physical delivery means the short delivers the underlying asset and the long pays for and receives it. Cash settlement means no asset moves at all — the two sides simply exchange the difference between the agreed price and the final price. Which path a contract takes is written into its spec, so it is decided by the contract, not the trader.
| Ending | What Happens at Expiry |
|---|---|
| Physical delivery | The short delivers the actual asset; the long pays and receives it |
| Cash settlement | No asset moves; only the cash difference is paid |
The spec decides which — you inherit it the moment you open the position.
Physical Delivery
Many commodity futures are physically delivered — crude oil, corn, and gold among them. At expiry the short delivers the actual asset and the long pays for it and takes it. In practice, though, only a very small share of contracts ever reach delivery — well under about 2% — because nearly everyone exits first.
- Crude oil: one short delivers 1,000 barrels and the long pays for them at the agreed price.
- Corn: one short delivers 5,000 bushels and the long pays for and receives them.
Caution: if you hold a physically-settled contract to expiry, you can be obligated to make or take delivery of the real commodity — actual barrels or bushels, not a cash adjustment.
Cash Settlement
Some contracts settle in cash because delivering the underlying is impractical. Stock-index futures are the classic case: you cannot hand over “the S&P 500.” So a contract like the E-mini S&P 500 settles in cash — no asset changes hands, and instead the difference between your entry price and the final settlement price is paid.
Say you are long one E-mini S&P 500 contract (multiplier $50) entered at 5,000, and the final settlement is 5,020.
- Entry price: 5,000
- Final settlement: 5,020
- Move: +20 points × $50 = +$1,000
- Result: +$1,000 credited in cash — no shares delivered
The whole contract resolves as a single cash figure; nothing physical ever moves.
Most Traders Close or Roll
Speculators and many hedgers have no interest in warehousing barrels or bushels, so they exit before delivery. There are two common ways to do it.
- Offset — take the opposite trade to flatten the position. If you are long one contract you sell one to close; if you are short one you buy one to close. The two cancel and you are flat.
- Roll — close the expiring “front” month and open the next month to keep the same exposure going. You give up the position that is about to expire and step into the following one.
Rolling is how a trader stays in the market past a single expiry: exit the near contract — the front month from Lesson 3 — and re-enter in the next delivery month. It is routine, but not free: you pay the bid-ask spread and any price gap between the two months, so a roll carries a small cost.
Why It Matters
Know your contract’s settlement type before expiry, not after. A cash-settled contract simply resolves to a number, but a physically-settled one can pull you into the real market.
A trader who forgets and holds a physically-settled contract into the delivery window can end up obligated to deliver or receive an actual commodity. The fix is simple: check the spec, and offset or roll in good time.
Interactive Checks
Check 1 of 3
A contract expires while you hold one E-mini S&P 500 future.
How is a stock-index future like this settled?
Check 2 of 3
A contract you hold is about to expire and you do not want delivery.
What do most futures traders do before expiry?
Check 3 of 3
You hold a physically-settled crude oil contract all the way to expiration.
What can happen?
Common Beginner Mistakes
- ❌ Not knowing whether your contract is physical or cash settled. It is in the spec — check it before you ever hold near expiry.
- ❌ Accidentally holding a physical contract into the delivery window. That is how a trader ends up obligated to make or take real delivery.
- ❌ Thinking you must take delivery. You do not — you can offset by taking the opposite trade before expiry.
- ❌ Assuming rolling is free. A roll costs the spread and any gap between the two months.
Quick Memory Tool
- A contract ends by physical delivery or cash settlement
- The spec decides which — not the trader
- Index futures are cash-settled; many commodities are physically delivered
- Most traders offset or roll before expiry
- Know your settlement type before the delivery window
Next Lesson
Futures vs Options vs Forwards — three related contracts that are easy to confuse. Next we compare them side by side: obligation vs right, and standardised exchange-traded vs private.