I have a question. I was reading about futures on investopedia and have come across the following: As the accounts of the parties in futures contracts are adjusted every day, most transactions in the futures market are settled in cash, and the actual physical commodity is bought or sold in the cash market. Prices in the cash and futures market tend to move parallel to one another, and when a futures contract expires, the prices merge into one price. So on the date either party decides to close out their futures position, the contract will be settled. If the contract was settled at $5 per bushel, the farmer would lose $5,000 on the futures contract and the bread maker would have made $5,000 on the contract. Question: if I buy index futures or any other futures, can I hold them for a week or month (I understand there is a "rollover" date) but is there any other cash settlement that can happen in between or on a daily basis? I am a little confused. thanks
I don't understand well the question and since I only trade index futures ( S&P e-minis) I will try to explain. This index futures settles for cash, there is only 1 expiration. Right now the DEC10 is the front month, it will expire on december 17. So if you buy the DEC10 ES (S&P e-minis) you can hold it all the way until december 17. If you plan on rolling the position to the next expiration (March 2011 or MAR11) traders roll their position a week before the expiration date, ussually the thursday of the prior week. I don't know anyone whom waits until the last day to roll the position. If you don't close your position by 8:30am of friday dec 17th, by the following monday your account will all cash and the futures position will disappear. loss/ profit will be also added or subtracted from your account Friday dec 17 is Triple Witching, look that up. Most of the time you can trade the futures until 4:15 pm on the expiration day but since dec 17 is triple witching the futures stops trading at 8:30 AM. Make sure you always know the triple witching days.
You can hold a futures position for a week or a month with no problem, the only thing you have to be aware is that gains/losses on futures positions are realized on a daily basis (aka variation margin). So there is actual cash flow in/out of your account on a daily basis. Essentially, it's as if you closed an open position at the end of the day and then instantly reopened it at the same price. This happens automatically at the end of every day, so you don't have to do anything except make sure you have enough cash to meet the daily margin requirement.
The futures weight is although calculated or say counted on daily basis but there are hardly any chances of the settlements occurring in between this very short time. So You can move ahead as planned.