Whether its oil, gold, cash or even bonds, all futures contracts revolve around a tangible product.
New futures traders often wonder if the delivery of a commodity will come to fruition after a contract expires. Should one be prepared to securely store or deliver 100 Troy Ounces of Gold at contract maturity?
While delivery of a commodity is technically 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 said delivery requirements is typically unrealistic for retail traders, thus traders avoid delivery by offsetting or rolling open positions before the contract reaches maturity.
How to Avoid Delivery
For this discussion, let’s reference the March 2017 Gold futures contract. The important date to note in the table below is the “First Notice” date as this is the key marker for traders that want to avoid delivery.
Two common methods traders use to avoid delivery:
- Many traders roll to the subsequent contract upon the First Notice date. Doing so will ensure the open position is on the appropriate month with the bulk of the volume and will also void any delivery requirements. Putting this in context, Gold traders actively trading in the month of February, will actually be trading the March contract.
- Traders can also offset or flatten an open position by the First Notice date via selling a long position or buying a short position and absorb a loss or take profit.
In extreme circumstances, if both the buyer and seller were to hold their open positions until the Last Delivery date, the seller would be obligated to deliver the commodity to the buyer. Vice versa, the buyer would be obligated to take delivery and pay the full contract price. The likelihood of this occurring is extremely small and the exchange would likely issue a receipt to the buyer to obtain said commodity.