What is the Last Trading Day
The last trading day is the final day that a futures contract may trade or be closed out before the delivery of the underlying asset or cash settlement must occur. By the end of the last trading day, the contract holder must be prepared to accept delivery of the commodity or settle in cash if the position is not closed.
BREAKING DOWN Last Trading Day
The last trading day is the final day that a futures contract can be traded or closed out. Any contracts outstanding at the end of the last day trading day must be settled by delivery of underlying physical commodities, exchange of financial instruments or by agreeing to a monetary settlement. The specific agreements covering these potential outcomes are contained in the futures contract specifications and vary between securities.
In general, most futures contracts result in exchange trading or a cash settlement rather than a delivery of the physical commodity since most market participants are hedging or speculating. Cash settlements also take care of any chances of default in the future as the buyer and seller need to put up margin and any gains or losses are settled each day.
Examples of Last Trading Day Transactions
Suppose that a speculative futures trader purchases a gold futures contract with an expiration date of August 31, 2017 and a last trading day of August 30, 2017. If the trader doesn't sell the contract by the end of the day on August 30, the contract must be settled by delivery of the underlying asset. Most contracts also include a cash settlement option which relieves the two parties from the physical exchange of the underlying assets.
On the other hand, suppose that a grocery store chain purchases orange juice futures contracts with the same expiration dates. They may choose to take physical delivery of the orange juice from the producer since they can sell it directly to consumers. After expiration the grocery store would receive a delivery notice and be required to make arrangements for receipt of the physical commodity.
Traders can find settlement dates in their derivative contract or by looking at various exchange websites for standard trade settlement details. Oftentimes, these exchanges will have a web page that lists all of their futures contracts and their settlement dates and times for traders to consider.
The most popular futures exchanges include:
The last trading day is important for investors to note as it allows them to close out of the contract before expiration. Futures contracts also have several notice days which provide the investor with details on the approaching settlement. Notice days can vary by contract with the first notice day often three to five days before the last trading day. If an investor’s contract position is not closed before the last trading day then they will be expected to proceed with delivery. Subsequently they will receive delivery notices and be required to arrange for final delivery of the underlying assets.