Do Futures Expire? What to Know About Expiration

Futures contracts are standardized financial agreements that obligate two parties to transact an asset at a predetermined price and future date. This agreement means the buyer is bound to purchase, and the seller is bound to sell, the underlying asset by the specified time, regardless of its market price on the expiration date. A fundamental characteristic distinguishing futures from instruments like stocks, which represent ownership, is their finite lifespan. All futures contracts come with a specific expiration date, meaning the contract ceases to be active for trading and must be settled.

The Nature of Futures Expiration

Futures contracts have a finite life because they represent an agreement for a future transaction, not perpetual ownership. The expiration date, also known as the delivery date, marks the final day a contract is valid for trading before it must be settled. This definitive end date ensures all contractual obligations are met. The purpose of expiration is directly tied to the underlying asset, whether it involves physical delivery of a commodity or a cash payment. Expiration provides a structured mechanism for contracts to be finalized, reducing the risk of unfulfilled obligations and maintaining market order.

Expiration Cycles and Dates

The timing of futures contract expiration is standardized and determined by the exchange where they are traded, rather than by individual participants. These dates are known well in advance. Common expiration cycles include monthly, quarterly, and annual schedules, though specific assets may have variations.

For example, many stock index futures expire quarterly, often on the third Friday of March, June, September, and December. Some energy futures, such as crude oil, might have monthly expirations. While the expiration date signifies the contract’s official end, the last day a contract can be traded often precedes the actual expiration date.

Settlement at Expiration

When a futures contract reaches its expiration and is not closed out beforehand, it proceeds to settlement, fulfilling the legal delivery obligations. The method of settlement is predetermined by the exchange and the specific contract terms. The two primary methods are physical delivery and cash settlement.

Physical delivery obligates the seller to provide the actual underlying commodity to the buyer, and the buyer is bound to accept delivery and pay the agreed price. This method is common for agricultural products, certain metals, and some energy contracts like crude oil. Only a small percentage of commodity futures contracts are physically delivered, as most traders prefer to close their positions before this occurs.

Cash settlement, conversely, involves no physical exchange of the underlying asset. Instead, a cash payment is made to reflect the difference between the contract price and the final settlement price, which is often based on an index or benchmark price on the expiration date. This method is typical for financial futures, such as stock index futures and interest rate futures, where physical delivery would be impractical or impossible.

Managing Positions Before Expiration

Most futures contracts are not held until their expiration date; instead, traders manage their positions to avoid the settlement process. The most common approach is offsetting or liquidating the position. This involves entering an opposite trade to the original position, such as selling a long contract or buying back a short contract, which cancels out the obligation. Offsetting allows traders to realize any profits or losses without engaging in physical delivery or cash settlement.

Another strategy is rolling over the contract, which allows traders to maintain their market exposure beyond the initial expiration. This process involves simultaneously closing out the expiring contract and opening a new, identical contract with a later expiration date. Rolling over is a common practice for traders who wish to continue their position in the market without the complexities of settlement.