Why Some Futures Contracts Are Cash-Settled vs Physically Settled
Every futures trader needs to know whether their contract settles in cash or through physical delivery. If you don’t, you’re risking forced liquidation, surprise margin hits, or getting stuck in rollover volatility. Settlement type changes how the contract behaves and what happens as expiration gets close.
What Cash Settlement Actually Means
Cash-settled contracts close out positions using the final settlement price—no actual goods change hands. These markets exist because physical delivery makes no sense for most traders.
- No storage costs
- No delivery logistics
- No risk of defaulting on physical obligations
- Cleaner rollover and expiration behavior
Index futures (ES, NQ, YM) are all cash-settled because no one is delivering an index.
What Physical Settlement Means
Physical settlement means someone is actually expected to take or deliver the underlying asset. That asset can be oil, metals, grains, livestock, or bonds.
| Physically Settled Contract | Underlying | Delivery Example |
|---|---|---|
| CL | Crude Oil | Standard WTI barrels |
| SI | Silver | 5,000 oz lots |
| ZC | Corn | Contracted bushels |
This is why physical markets behave violently near expiration—no one wants delivery unless they’re hedging production or consumption.
Why Some Contracts Are One Type and Not the Other
1. Physical Markets Require Physical Delivery
Energy, metals, ag products—these are real goods with real industries behind them.
2. Financial Contracts Don’t Make Sense to Deliver
You can’t deliver the NASDAQ-100. So it settles in cash.
3. Regulatory and Exchange Rules
Exchanges choose settlement type based on liquidity, user base, and product purpose.
How Settlement Affects Price Behavior
Cash vs physical settlement dramatically changes expiration risk:
- Physical: violent roll behavior, delivery risk, unexpected squeezes
- Cash: smoother roll, more stable expiration prices
To understand the delivery mechanics behind physical contracts, read expiration risk explained.
How Retail Traders Should Handle Each Type
Here’s the no-bullshit guide:
- Don’t hold physical contracts into expiration—ever
- Roll early to avoid stress and volatility spikes
- Expect more aggressive squeezes near expiration in physical markets
- Expect cleaner transitions in cash-settled index futures
The Bottom Line
Cash-settled contracts exist because physical delivery would be pointless. Physical settlement exists because the underlying industries depend on it. Know the difference or expiration will ruin your trading week.