Physical delivery

Physical delivery is the transfer of the actual commodity from a futures seller to a futures buyer to satisfy a contract that has reached expiry.

Physical delivery is the exception rather than the rule in most futures markets: the large majority of contracts are closed out before expiry and never result in an actual shipment of grain or metal. For the small share that do go to delivery, the seller must supply a lot that meets the exchange’s grade and location rules, typically stored in a certified exchange warehouse or a designated port.

Delivery matters even to traders who never take it, because the threat of it disciplines the futures price to track the physical market. If a futures price drifted too far from what the real commodity was worth, someone could profit by taking or making delivery, which pulls the two back together. The delivery month specified in the contract sets exactly when this can happen. See how a futures contract settles.