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Tips When Trading Physical Commodity Futures

futures commodities physical delivery

When trading futures contracts derived from physical assets such as oil, gold, cotton or soybeans, there are number of unique concepts to be familiar with versus trading cash settled contracts.

Cash Settled vs Physically Delivered

All futures contracts are either cash settled or physically delivered. When cash settled futures contracts like E-mini equity index futures expire, a simple debit or credit is issued. However, physically delivered contracts such as gold, oil or soybeans technically require the investor to either produce or take delivery of the underlying commodity upon expiration.

While physical delivery of a commodity is possible, it is generally not allowed by the Futures Commission Merchant (FCM) without making the necessary arrangements beforehand such as proper storage facilities & the ability to purchase the entire contract.

Furthermore, meeting these futures delivery requirements is typically unrealistic for retail traders, thus traders avoid delivery by rolling over their positions.

Although NinjaTrader Brokerage strongly advises against taking delivery of a product, customers should contact the Trade Desk to discuss delivery requirements at least 30 days prior to the First Notice Date.

First Notice & Last Trade Date

Traders of physically deliverable futures contracts should also be aware of the following 2 dates:

  • First Notice Date – the first day the exchange can assign physical delivery to investors of futures contracts
  • Last Trade Date – the last trading day of a futures contract before delivery of the underlying asset must take place

Trading of physical commodities is prohibited from the business day preceding the earlier of the two dates above through the Last Trade Date. These dates vary by contract and can be found on the appropriate exchange’s website.

Traders who have positions or place orders for such contracts during this time are subject to immediate liquidation and associated margin violation fees. It is the responsibility of the individual trader to avoid such fees by offsetting or rolling open positions before the contract reaches maturity.

See how to roll over futures contracts in NinjaTrader in this 1-minute video:

Cost of Carry for Commodities

Physical commodities such as crude oil differ from stock prices in that the underlying deliverable commodity is a physical entity that must be shipped and stored, unlike equity futures which are a cash settled and entirely electronic transaction. Therefore, costs to ship and store the commodity must be accounted for in the futures price, which is referred to as the cost of carry.

While you may be able to buy a barrel of crude for a penny, it may cost you $10 per barrel to store it for a month in your warehouse, and $10 more to ship it, making the real cost $20. This is why the later contract months tend to trade at higher prices than the front month contract.

NinjaTrader’s Trade Desk Calendar

Bookmark NinjaTrader’s Trade Desk Calendar and stay current on futures last trade dates, first notices, roll dates and contract expirations, as well as other important dates including employment reports & FOMC meetings all in one place!

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