When and How Do Futures Contracts Expire?

Futures contracts are standardized agreements between two parties to buy or sell an asset at a predetermined price on a specific future date. Unlike stocks, which can be held indefinitely, futures contracts have a finite lifespan and an expiration date. Understanding these expiration dates is important for anyone involved in futures trading, as it helps manage positions and understand obligations.

Understanding Expiration Dates

Expiration dates for futures contracts are standardized by the exchanges where they trade. These dates are fixed and known in advance, ensuring predictability. Common cycles include monthly, quarterly, or seasonal schedules, depending on the underlying asset. For instance, many stock index futures expire quarterly in March, June, September, and December, while some energy futures might expire monthly.

The exact expiration date often falls on a specific day, such as the third Friday of the expiration month, though this can vary. These details are part of the contract specifications, publicly available on exchange websites. Traders can also find expiration dates through brokerage platforms, financial news outlets, or market calendars.

What Happens at Expiration

When a futures contract reaches its expiration date, it must be settled. There are two primary methods: physical delivery and cash settlement. Contract specifications dictate which method applies.

Physical delivery involves the actual transfer of the underlying asset from seller to buyer. For example, in a commodity futures contract, the seller delivers the specified quantity of the commodity, such as barrels of oil or bushels of grain, to the buyer. This process requires logistical arrangements. While common for certain commodities, a relatively small percentage of all futures contracts are physically delivered. For private traders, brokers often automatically close out physically delivered positions before expiration to prevent actual delivery obligations.

Cash settlement, which is more common, involves a financial exchange based on the difference between the contract price and the final settlement price. Instead of transferring the physical asset, the financial gain or loss is credited to or debited from the accounts of the buyer and seller. This method is widely used for financial futures, such as stock index and interest rate futures, where physical delivery is impractical. The final settlement price is determined by the exchange. It is important to distinguish between the “last trading day,” the final day a contract can be traded, and the actual “expiration day” or “delivery day,” when settlement occurs. For cash-settled contracts, the last trading day is often the same as the expiration date.

Strategies Before Expiration

Traders often take specific actions before a futures contract expires to manage their positions and avoid settlement obligations. One common strategy is “rolling over” a contract. This involves closing the current expiring futures position and simultaneously opening a new position in a deferred month contract for the same underlying asset. This allows traders to maintain market exposure without facing settlement.

The decision to roll over a contract is typically made as the expiring contract approaches its last trading day. For example, a trader holding a long position in a September futures contract who wishes to maintain exposure beyond September would sell the September contract and buy a December contract. This process ensures continuity of the trading position. Another alternative for traders is simply to close out their position before the last trading day by executing an offsetting trade. This means taking an opposite and equal transaction to neutralize the initial trade, realizing any profits or losses without proceeding to settlement. While some traders might allow a contract to expire and settle if that aligns with their trading objective, most individual traders prefer to manage their positions proactively.