Settlement and Rolling: How Contracts End
Every future dies on a known date, and what happens at that death is the source of the market's scariest myth — the one about waking up to a truckload of crude oil in your driveway. The reality is boring and automatic, once you know whether a contract settles in cash or in the physical thing. Let's close Unit 1 by making expiration hold zero surprises.
Most financial futures — stock indexes, many rates — settle in cash: at expiration, the difference between your entry and the final price is simply paid or collected, and the contract vanishes. Nobody delivers a basket of 500 stocks. This is the clean, common ending, and it's why index and rate futures are pure exposure with no logistics attached.
Commodity futures like crude oil or grain are physically settled — whoever holds the contract to the bitter end is obligated to deliver or receive the actual barrels or bushels. This is real, and it's exactly why the 'oil in the driveway' story has a kernel of truth. But it only threatens participants who ignore the calendar, which no informed person does.
Speculators close or roll their positions well before the delivery window opens — the exchange even publishes 'first notice' and 'last trading' dates as bright lines. Taking physical delivery is a deliberate act reserved for commercial players who actually want the goods. The horror story isn't a risk you stumble into; it's a door clearly marked, that only the careless walk through.
Since each contract expires, staying exposed to a market means rolling — closing the expiring month and opening the next, over and over. You met the cost of this in the last lesson; here's the mechanics: it's two trades done near expiration, and it's why 'continuous' commodity exposure is really a relay race of contracts, each handing off to the next. Every roll pays a spread and touches the curve's shape.
Even if you never hold a contract, settlement and roll explain headlines you'll otherwise misread — why a commodity ETF diverges from its commodity, why a specific expiration can go haywire in a supply crunch, why 'the front-month contract' is the number the news actually quotes. Understanding the plumbing is what lets you interpret the water pressure. That's the whole point of Unit 1.
Cash settles in money, physical settles in goods, the careful never take delivery, and continuous exposure is a relay of rolled contracts. Unit 1 done — you now know the machine. Next we tour the five machines whose prices run everything you own.
Not financial advice · Educational only