How are futures settled?
Cash Settlement
In most cases, delivery will take place in the form of cash settlement. When a contract is cash-settled, settlement takes place in the form of a credit or debit made for the value of the contract at the time of contract expiration.
Futures Options Settlement Prices
Final settlements are based on Volume Weighted Average Pricing (VWAP). Additionally, you may trade the contract anytime up until the time of settlement on the date of expiration.
The gain or loss is settled daily based on the difference between the futures contract price and the prevailing market price. If the futures contract price stands higher, the trader suffers a loss, and vice versa.
Depending on the contract, the values exchanged can be settled in cash. Most often, the trader will simply pay or receive a cash settlement depending on whether the underlying asset increased or decreased during the investment holding period. In some cases, however, futures contracts will require physical delivery.
Hence all the future contracts will automatically expire on the last day of the F&O expiry at the close of trade. Apart from the futures contract settlement that happens on the last day of F&O expiry, there is also a future contract settlement process that the exchange follows daily.
Futures are immediate settlement, and your money is available as soon as you close out your position.
In addition, because of its popularity, most financial derivatives, especially options and futures contracts, are cash-settled. Cash settlement is the more simple and convenient mode of settlement, as it only involves the upfront net cash amount as the total cost.
Futures contracts, on the other hand, are standardized contracts that trade on stock exchanges. As such, they are settled on a daily basis.
settlement price. CME Group staff determines the daily settlements in the E-Mini NASDAQ 100 (NQ) futures based on trading activity on CME Globex between 15:14:30 – 15:15:00 Central Time (CT), the settlement period. The lead month is the anchor leg for settlements and is the contract expected to be the most active.
What is an example of a futures contract settlement?
For Futures Contracts
The final settlement price of the contract will be the delivery settlement value. For example, consider you hold a long futures position of 1 lot of 200 shares of XYZ company till the expiry at ₹ 2000 each (as on the contract date). Then the settlement value will be ₹ 4,00,000 (2000 * 200) .
Having one final daily settlement for all means every open position is treated equally. By publishing these daily settlement values the exchange provides a great service to commercial and speculative users of the futures markets and the underlying markets they derive their price from.
| Instrument Type | Underlying | Settlement Price () |
|---|---|---|
| FUTSTK | ABB | 4539.35 |
| FUTSTK | ABB | 4549.80 |
| FUTSTK | ABBOTINDIA | 28252.60 |
| FUTSTK | ABBOTINDIA | 28462.45 |
Final settlement price for futures contract and option contract shall be the closing price of the relevant underlying index/security in the normal market of the Capital Market segment of the Stock Exchange on the last trading day of such futures contract.
Futures contract expiration is the countdown clock of this part of the trading world. It marks the last day that you can trade a futures contract before it expires. After this day, the contract is settled either in cash or through the physical delivery of the underlying asset, depending on the terms of the agreement.
Some of the types of financial futures include stock, index, currency and interest futures. There are also futures for various commodities, like agricultural products, gold, oil, cotton, oilseed, and so on.
If you're trading the E-mini S&P 500 future (/ES), the underlying contract represents $50 multiplied by the price of the index. E-mini S&P 500 futures are financially settled, so when delivery takes place you'll receive a cash credit or debit that's based on the settlement price.
No one-trick pony here—futures can help diversify your portfolio, let you interpret broader market moves, and even potentially hedge against loss. But, of course, with benefits comes some risks. Gain a better understanding of it all so you can plan your strategy.
The best hours for trading are the most liquid, between 9:00AM and 11:30AM. Pit session closes at 2:30PM EST, when floor trading stops for the day. Therefore, the best trading in the afternoon is the last hour between 1:30PM to 2:30PM EST.
Futures contracts are agreements to buy or sell a specific asset at a predetermined price at a future date. Therefore, holding an overnight position in futures trading could mean potentially significant profits or losses, depending on market volatility and the trader's ability to predict market trends.
What happens if I don't square off futures on expiry?
If an options contract position is not squared off before the expiration date, the trader can lose the total premium and any taxes and brokerage charges paid. You can utilize leverage to make purchases or sales during the trading day with an intraday (MIS/CO) order (up to 5 times the money in your account).
In the case of options contracts, you are not bound to fulfil the contract. As such, if the contract is not acted upon within the expiry date, it simply expires. The premium that you paid to buy the option is forfeited by the seller. You don't have to pay anything else.
Theoretically, you can trade as many E-mini contracts as your account balance allows you. Because E-mini contracts are traded on margin ($500/contract) you can trade more contracts with less money. For example, if you have $3,500 in your account, you could technically trade 7 contracts ($500 x 7 =$3500).
The kinds of futures contracts are: Commodities, currency, interest rate, and stock market index futures.
You can choose to exit your index futures contract before the date of expiry if you believe that the market will rise before the expiry of your contract period and that you'll get a better price for it on an earlier date.
