All futures contracts have expirations dates.
There are three basic approaches for managing the expiration of futures
contracts:
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.
