Physical Delivery vs Cash Settlement
Also known as: physical settlement, cash settlement, deliverable contract, settlement method
What is it?
Settlement method is what happens when a contract expires: a physically delivered contract obliges the holder to exchange the actual asset, while a cash-settled one simply pays the difference in money and closes. The gap between those two outcomes is enormous in practice. One E-mini S&P contract bought at 5,240 and settled at 5,268 credits 28 points at $50 - $1,400 - and the position disappears.
| Holding to expiry | Physically delivered | Cash settled |
|---|---|---|
| What changes hands | The asset itself - 1,000 barrels of crude | Money only - the difference in value |
| Typical contracts | Crude (CL), gold (GC), grains | Index (ES), volatility, most rate futures |
| Date that really ends the trade | First notice day, often before expiry | The final settlement date |
| If you hold to the last day | A delivery obligation | Settles harmlessly in cash |
| What retail brokers do | Force-close before notice, often with a fee | Let the position settle normally |
| Worked example | 1,000 barrels to collect at Cushing | ES 5,240 to 5,268 credits 28 x $50 = $1,400 |
One crude oil contract held past first notice day obliges you to take 1,000 barrels of physical oil at Cushing, Oklahoma, which no retail account is equipped to do. That is why the date to watch on a deliverable contract is not expiry but first notice day, which can arrive several sessions earlier. Most retail brokers force-close deliverable positions before it, sometimes at market and sometimes with a fee - but that is a broker policy, not a guarantee written into the contract.
Cash-settled contracts can be held to the final bell without any of this.
Why it matters: Settlement method decides whether an expiring contract quietly pays out in cash or leaves you obliged to take delivery of an asset you cannot store.
It determines whether holding to expiry is harmless or creates a delivery obligation your account was never set up to meet.
Real-world example
An E-mini S&P contract bought at 5,240 and settled at 5,268 simply credits 28 points at $50 - $1,400 - while one crude contract held past first notice obliges delivery of 1,000 barrels.
How SignalBots handles it
SignalBots signals close on a stated exit rather than at an instrument's expiry, so no position is left running toward a settlement date you did not plan for. See /risk-warning.
Pro tip
Look up first notice day, not just the expiry date - on a deliverable contract that earlier date is the one that actually ends your ability to hold the position.
Common pitfalls
Assuming the broker will always auto-liquidate a deliverable contract for you. Many do, but the fee and the forced exit at market price are still yours.
Frequently asked questions
How do I know which method a contract uses?
It is written into the exchange's contract specification, on the same page as the contract size and tick value. Energy, metals and agricultural contracts are usually deliverable; index, volatility and most rate contracts are cash-settled.
Can a retail trader really be forced to take delivery?
It is rare, because brokers close deliverable positions before first notice day and many block them outright near expiry. But the obligation is real, and the protection is your broker's policy rather than something the contract itself provides.
What is first notice day?
The first date on which a short position holder can serve notice of intent to deliver, meaning a long holder could be assigned. It often falls before the last trading day, so it is the practical deadline for exiting a deliverable contract.
Does cash settlement mean lower risk?
It removes the delivery problem, not the market risk. The price move that produced the settlement figure was just as real, and your capital was just as exposed on the way there.
How are CFDs and spread bets settled?
Always in cash - they are contracts over the price difference and never involve the underlying asset. That is exactly why they are the common retail route into commodity exposure that would otherwise be deliverable.
Trading involves substantial risk of loss. Historical and backtested results do not guarantee future performance. Read the full risk warning.
