Delivery and Settlement Price

Settlement price: not the last trade

The settlement price is usually the volume-weighted average price over a period before the close, which is harder to push around than the last trade. Both mark-to-market and final delivery use it.

Expiration: deliver goods, or pay cash?

If you still hold a position after the last trading day, it has to be settled: commodities like crude oil mostly use physical delivery; a stock index can't be delivered, so it uses cash settlement and only the difference moves.

Most people exit early

Speculators don't want 1,000 barrels of oil, and many hedgers prefer to buy and sell the physical goods in their local spot market. So almost all positions are closed or rolled before expiration, and only a small share are actually delivered.

Key takeaways

• The settlement price is often the volume-weighted average price over a window before the close. Both daily mark-to-market and final delivery use it.
• If you still hold after the last trading day, you go to delivery: commodity futures mostly use physical delivery, stock index futures mostly cash settlement.
• In physical delivery, the long pays the final settlement price and takes the goods. Add in the mark-to-market P&L along the way and the actual cost is exactly the opening price.
• Cash settlement works just like closing early: only the price difference is settled and no goods change hands. Most traders close before expiry.

Try it yourself

You can do these exercises in this lesson's interactive simulation:

1. Click “Example: delivery @ $86” and watch the animation: how much was paid for delivery? How much mark-to-market was moved in? What's the “Actual cost per barrel”?
2. Keep physical delivery, drag the “Final settlement price” to $72 and play again: what do the payment and mark-to-market become? Did the actual cost per barrel change?
3. Click “Cash settlement @ $74”: do any goods change hands? What's the final P&L? Then switch to “Close before expiration”: is the result the same?
4. Look at “Where the settlement price comes from” at the bottom right: what are the close (last trade) and the volume-weighted settlement price? Which one does mark-to-market use?

Quiz and explanations

1. Three trades before the close: $80 (100 contracts), $81 (300 contracts), $81 (100 contracts). Volume-weighted, roughly what's the settlement price?

Answer: $80.80.(80 × 100 + 81 × 300 + 81 × 100) ÷ 500 = $80.80. $80.67 is the simple average, and $81 is the last trade.

2. You open 1 long crude oil contract at $80 and hold it all the way to physical delivery, with a final settlement price of $86. What's your actual cost per barrel for the 1,000 barrels?

Answer: $80.At delivery you pay $86 for $86,000 of oil, but mark-to-market already credited you $6,000, so you net $80,000, or $80 per barrel: exactly your opening price.

3. How are stock index futures usually settled at expiry?

Answer: Cash settlement, paying only the difference.You can't "deliver" an index, so the difference is paid in cash at the final settlement price.

Terms in this lesson

• cash settlement (Cash Settlement): No goods change hands at expiry; only the difference between the final settlement price and your entry is paid in cash, as with stock index futures that can't be “delivered”.
• last trading day (Last Trading Day): The last day a contract can be traded; contracts still open after it go to delivery.
• mark-to-market (Mark-to-Market): Profit and loss is calculated at the settlement price every trading day and actually moved into or out of your margin account.
• physical delivery (Physical Delivery): At expiry the short delivers the goods to a designated warehouse and the long pays the final settlement price to take them; most commodity futures work this way.
• settlement price (Settlement Price): The official price an exchange publishes each day, often a volume-weighted average near the close (rules vary); mark-to-market and margin use it, not the last trade.