Last Trading Day
The last trading day is the final day that a futures contract, or other derivatives with an expiry date, may trade or be closed out before the delivery of the underlying asset or cash settlement must occur. At 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. The same concept applies to options contracts.The last trading day is the final chance to close the position, otherwise the underlying will be delivered if applicable. If the option is worthless, then it does not need to be closed, it will simply expire.
Definition: The last trading day is the final day on which trading or settlement of a futures contract or other expiring derivative instrument can occur. At the end of the last trading day, contract holders must be prepared to take delivery of the commodity or settle in cash for any open positions. The same concept applies to options contracts. The last trading day is the final opportunity to close positions; otherwise, the underlying asset will be delivered if applicable. If the option is worthless, it does not need to be closed and will expire worthless.
Origin: The concept of the last trading day originated with the development of the futures market. The futures market dates back to 19th-century Chicago, where agricultural product trading required a clear delivery date to ensure smooth transactions. As financial markets evolved, this concept extended to other derivatives such as options and financial futures.
Categories and Characteristics: The last trading day can be categorized based on different types of derivatives:
- Futures Contracts: The last trading day is typically a specific date in the contract month, by which holders must close their positions or prepare for delivery.
- Options Contracts: The last trading day is usually the third Friday of the expiration month, by which holders must decide whether to exercise or close their positions.
- Clear Deadline: The last trading day provides traders with a clear deadline, ensuring orderly market operations.
- Delivery or Settlement: At the end of the last trading day, open contracts must be delivered or settled in cash.
Examples:
- Example 1: An investor holds a December-delivery crude oil futures contract, with the last trading day being December 20. If the investor does not close the position by this date, they must be prepared to take physical delivery of the crude oil or settle in cash.
- Example 2: An investor holds a stock option expiring in June, with the last trading day being the third Friday of June. If the option is worthless by this date, the investor can choose not to exercise it, and the option will expire worthless.
Common Questions:
- Q: What happens if I don't close my position by the last trading day?
A: If you don't close your position by the last trading day, futures contract holders must take delivery of the commodity or settle in cash, while options contract holders may have their options automatically exercised or expire worthless. - Q: What is the difference between the last trading day and the expiration date?
A: The last trading day is the final day for trading or closing positions, while the expiration date is the official date the contract expires, usually following the last trading day.
