What is Last Trading Day?
970 reads · Last updated: December 5, 2024
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 futures contracts or other derivatives with an expiration date can be traded or settled. By the end of the last trading day, contract holders must be prepared to take delivery of the commodity or settle in cash if there are open positions. The same concept applies to options contracts. The last trading day is the final opportunity to close positions, otherwise, delivery of the underlying asset will occur 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, particularly in the late 19th century, as futures contracts became popular. Exchanges needed to set a clear deadline for completing trades and settlements. This system helped standardize market operations and reduce uncertainty.
Categories and Features
The last trading day primarily applies to futures and options markets. In the futures market, the last trading day is typically a specific date in the contract's expiration month, while in the options market, it may be a trading day before the contract's expiration. Its features include: 1. Providing contract holders with the last opportunity to trade; 2. Ensuring market liquidity and stability; 3. Potentially increasing market volatility, as investors may engage in significant trading to close or hedge positions on the last trading day.
Case Studies
Case 1: In 2020, the crude oil futures market experienced historic price volatility, partly because investors failed to close positions before the last trading day, leading to physical delivery requirements when storage capacity was limited. Case 2: In the stock options market, investors often adjust their positions before the last trading day to avoid options expiring worthless. For example, if an investor holds a call option and the stock price does not reach the strike price before the last trading day, they might choose to sell the option to minimize losses.
Common Issues
Common issues investors face include: 1. Failing to close positions before the last trading day, resulting in unexpected physical delivery or cash settlement; 2. Misunderstanding the difference between the last trading day and the contract expiration date, leading to operational errors. Investors should familiarize themselves with contract details in advance to ensure they are prepared before the last trading day.
