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Physical or Cash Settlement for day trades


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Physical or Cash Settlement for day trades

  #1 (permalink)
zak010
France , Paris
 
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Hello guys, i'm new to the trading world, my goal is to know more about trading with futures , specially gold futures and WTI crude oil futures, so my first question is which settelment method in the contract is better as a day-trader, Cash Settlement or Physical Settlement? or it doesn't really matter ?

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  #2 (permalink)
 
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 bobwest 
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zak010 View Post
Hello guys, i'm new to the trading world, my goal is to know more about trading with futures , specially gold futures and WTI crude oil futures, so my first question is which settelment method in the contract is better as a day-trader, Cash Settlement or Physical Settlement? or it doesn't really matter ?

Hi @zak010, I have moved your question from the "Introduce yourself here" section to the more relevant "Traders Hideout > Commodities" section. The "Introduce yourself here" section is just for introductions to give a new trader a chance to make a first post, and are, honestly, seldom read by anyone else. Your question, although basic, is of more general interest and should be in the more widely-read parts of the forum.

Actually, as a day trader, the question doesn't really matter much, since a day trader would not be taking or making either physical or cash delivery. Prior to settlement, you would just be trading on the short-term fluctuations of the contract, and would exit before the daily close, and also exit before settlement.

As a contract nears its settlement date, traders who don't plan to go to settlement will generally roll their positions out to the next contract, or simply close them out. Generally, your broker will just close your position if you still hold a contract just before settlement date, unless you have made prior arrangements to actually receive or deliver. Most futures contracts will be closed out (offsetting a contract to buy with one to sell, for example), rather than settled.

Physical settlement of a physical commodity like WTI or gold is not likely something that you will ever do, whether you are a day trader or not. For example, unless you are actually in the oil business, why would you be receiving or delivering actual barrels of WTI (West Texas Intermediate Crude Oil) at the storage facility in Cushing, Oklahoma in settlement of a contract? You would just close the position by offsetting the contract.

More info on settlement here:

https://www.investopedia.com/terms/p/physicaldelivery.asp

Bob.

When one door closes, another opens.
-- Cervantes, Don Quixote
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 SMCJB 
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zak010 View Post
Hello guys, i'm new to the trading world, my goal is to know more about trading with futures , specially gold futures and WTI crude oil futures, so my first question is which settelment method in the contract is better as a day-trader, Cash Settlement or Physical Settlement? or it doesn't really matter ?

I'm not sure I understand your question (or maybe you didn't mean what you actually asked)
  • The main NYMEX Crude Oil contract ("CL") is a physically delivered contract. If you go to final settlement you will be expected to deliver/receive physical crude oil. In reality your broker will 'probably' never allow this to happen and will auto liquidate you before it happens.
  • The NYMEX eMini ("QM") and Micro ("MCL") Crude contracts, and the ICE WTI contract are all financially settled. If you have a position in these contracts on the final day of trading - the day before CL expires - then you will be financially settled at the closing price (which is the CL closing price). Due to tick size I would encourage people to trade MCL and not QM.
  • There is also a NYMEX Financial contract ("WS") that also settles financially but it does not trade electronically.
  • The main NYMEX Gold contract ("GC") and its Micro ("MGC") are both physically delivered contracts. If you have a position past the First Notice Day (which is normally the last trading day of the prior calendar month) you will be expected to deliver/receive physical gold. In reality your broker will 'probably' never allow this to happen and will auto liquidate you before it happens.
  • The NYMEX eMini ("QO") contract is financially settled. If you have a position in these contracts on the final day of trading in the month prior to the delivery month then you will be financially settled at the closing price (which is the GC closing price).
  • There are other NYMEX Gold contracts (Kilo & Enhanced Delivery) but these do not trade.

But....

If your day trading, this is probably irrelevant to you. Just don't trade the physical contracts on the last day of trading. In reality you should probably be trading the contract with the most volume which means you will be switching to the next contract several days before the last day of trading.

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 bobwest 
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SMCJB View Post
I'm not sure I understand your question (or maybe you didn't mean what you actually asked)

...
But....

If your day trading, this is probably irrelevant to you. Just don't trade the physical contracts on the last day of trading. In reality you should probably be trading the contract with the most volume which means you will be switching to the next contract several days before the last day of trading.

As usual, @SMCJB pretty much gives the last word on crude oil.

I had forgotten to mention that how a contract settles is set by the exchange, and you do not have any choice as to how a particular contract settles, if that's what you were asking about. You can choose between them, but which way it settles is not something you can choose. I'm not sure if you were asking this or not, but as @SMCJB points out, how it settles is set by the exchange.

And yes, if you're day trading, you won't be holding to settlement anyway. You will be wanting to trade the "front month," which is the one with the highest volume. So as you go into the last week or so, you would normally be watching the volume and switch to the next month as its volume starts to exceed the old one.

More here: https://www.cmegroup.com/education/courses/introduction-to-futures/understanding-futures-expiration-contract-roll.html

Bob.

When one door closes, another opens.
-- Cervantes, Don Quixote
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zak010
France , Paris
 
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Hello everyone,
first I would like to thank you guys a lot for taking your time to respond to my question, you've been a great help to me.
I actually have another question, as a day trader I wanna know how Iím gonna make my choice on the future contract that I'm gonna trade with based on its specifications ?[ for example, which one is better to trade at the moment gold or E-mini gold and why based on the contract specifications(size, tick size, expiration date,..)]

Sincerely,
Zak

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 SMCJB 
Houston TX
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It's all about RISK

Gold is trading $1850. Lets say you have a trade where you think gold is going to $1875 and you are prepared to risk $10 down to $1840. (So you have a risk:reward of 2.5:1). $10 on GC (the full size contract) is 100oz * $10 so $1000. $10 on MGC (the Micro contract) is 10oz * $10 = $100. Now imagine that you have a $20,000 account, and your following the common rule of never risking more than 2% of your account on any one trade*. 2% of $20,000 is $400. So the biggest position you would want in this trade would be 4 MGC / Micro Gold contracts.

* Full Disclosure I don't position size like this but this is the most common rule on how to do it.

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Last Updated on February 20, 2023


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