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How are expiration dates managed?
All futures contracts have expirations dates. There are three basic approaches for managing the expiration of futures contracts:
- Offset your position
Prior to expiration, you may offset by covering (buying back) a short position or selling a long position. You do not have to wait until the expiration date to complete your trade.
Example: A trader takes a long position of 2 contracts of XYZ company (equal to 200 shares) that expire in December. To offset the position, the trader would subsequently sell 2 contracts of XYZ with the same expiration month. The trader could just as easily have taken an initial short position by selling 2 December XYZ contracts and then offsetting this position by buying 2 contracts of December XYZ.
- Wait until the contract expires, then make or take delivery
On the expiration date, holders of short positions of stock futures are required to deliver physical shares of the underlying stock, and holders of long positions take delivery of the underlying stock.
This means that buying a single stock future and holding it until expiration guarentees your ownership of the underlying stock after the expiration date. If you offset your position, this process does not apply. Consult your broker regarding its procedures and fees associated with delivery if you are considering holding a stock until expiration.
- Roll the position over from one contract month into the next
If you hold a long position in a given expiration month, you can simultaneously sell that expiration month and buy the next expiration month for an agreed-upon price differential. Thus, the position is transferred, or rolled forward, and can be held for a longer period.
