Cash-settled vs physical delivery
Distinguish cash-settled futures from physically deliverable futures and explain why retail rarely takes delivery.
Lesson path
Futures, Indices, and Commodities
Futures Basics
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Distinguish cash-settled futures from physically deliverable futures and explain why retail rarely takes delivery.
Two ways a contract ends
At the end of a futures contract's life, something has to happen — the contract has to settle. There are two settlement methods, set by the exchange when the contract is designed: cash settlement and physical delivery. Knowing which one your contract uses is part of basic futures literacy.
Cash settlement: at expiration, the exchange calculates a final settlement price, and your account is credited or debited based on the difference between that price and your entry. Nothing physical changes hands. All equity index futures work this way — ES, NQ, RTY, and their micro counterparts (MES, MNQ, M2K). Why? Because 'delivering the S&P 500' is impossible. You can't ship an index. So the contract is settled financially. Most currency futures and most volatility futures are also cash-settled.
Physical delivery: at expiration, the seller delivers the actual commodity to the buyer through a regulated process — warehouse receipts, delivery notices, CFTC-supervised logistics. Most commodity futures are physically deliverable. Crude oil (CL) is deliverable as 1,000 barrels to Cushing, Oklahoma. Gold (GC) is deliverable as 100 troy ounces of approved bars at COMEX-approved vaults. Corn, wheat, soybeans, natural gas — all physical. In practice, less than 1 percent of open interest ever actually goes to delivery. But the option is what keeps the futures price anchored to the underlying physical market.
What this means for retail traders: pay attention to 'first notice day' on physical contracts — that's the first day the short side can issue a delivery notice. Most retail brokers will force-close any long position in a physical commodity before first notice day to prevent customers from being on the hook for delivery. With cash-settled indices, there's no first notice day; you just need to be aware of the last trading day so you can close or roll before it. Either way, the simple rule is: don't carry positions into the final day unless you know exactly what's about to happen.
Recap: index futures (ES, NQ, micros) are cash-settled. Commodity futures (CL, GC, corn) are physically deliverable but rarely actually delivered. Close or roll before the final day in either case.
Knowledge check
Answer before moving on.
1. Why are equity index futures (like ES and NQ) cash-settled?
2. If you accidentally held a long crude oil futures contract through expiration, what would most likely happen?
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