One of the important differences between shares of stock and futures contracts is that the former are perpetual instruments, and can be held until an investor is ready to sell them, while the latter always have a fixed expiration date. To maintain a position in a futures market, investors typically "roll" their exposure by closing the position in the contract soon to expire and opening a new position in a contract with a later expiration. Even if you don't intend to maintain a position in a given product, for any futures that are not cash settled, it's important to know when you should exit a position if you don't intend to take delivery.
Futures exchanges use some specific terms to identify important dates in a product's calendar:
Last Trading Day: This is the last day that a contract can be traded before delivery of the underlying occurs. Roll or close your position on or before this date. First Notice Day: This is the first day on which a buyer of a futures contract may be notified that a seller intends to make delivery of the physical commodity or financial asset. Last Notice Day: This is the last day on which notice of intent to deliver may be given.
These dates vary sometimes by product, and to make the process of rolling an expiring contract straightforward, we will walk through two examples.
First, here are the product specifications for Henry Hub Natural Gas futures at the CME. In the row labeled "termination of trading," we read that "trading of any delivery month shall cease three (3) business days prior to the first day of the delivery month." So, for instance, assume we are long the January 2014 natural gas futures. January 1 is the first day of the delivery month, and the date that is three business days prior to that is December 27, 2013. That's the last date when we would be able to roll or close the position in that contract. Here is a product calendar showing important dates for each natural gas contract.
Let's look at a product with different specifications. Assume we are short the March 2014 Cotton No. 2 futures at the ICE; here are the product specifications. The last trading day listed there is seventeen business days from the end of the spot month. For the March 2014 contract, March is the spot month, and seventeen business days from the end of March 2014 is March 7. If you click over to the Expiry Dates tab, you'll see 3/7/14 listed as the LTD or last trading day.
We've been talking just about the expiration dates for futures contracts. For options on futures, many products have their own additional rules. For example, for regularly cotton no. 2 options corresponding to the futures contracts, the last trading day is the last Friday preceding the first notice day for the underlying futures by at least five business days.
The easiest way to avoid any surprises is to check the exchange websites to confirm the expiration dates for the contracts you're trading. As you become more experienced trading a given product, the key dates will become more familiar.
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