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A first notice day (FND) is the deadline date after which an investor who has purchased a futures contract may be required to take physical delivery of the contract's underlying commodity. The first notice day can vary by contract and will also depend on exchange rules.
If the first business day of the delivery month was Monday, Oct. 1, the first notice day would typically fall one to three business days prior, so it could be Wednesday, Sept. 26, Thursday, Sept.27, or Friday, Sept. 28.
Most investors close out their positions before first notice day because they don't want to take delivery of physical commodities.
A futures contract includes the details of how and when the commodity will be delivered. This information is supplied to the clearinghouse by the holder of the short position. The clearinghouse then sends a delivery notice to the buyer, or long position holder of the pending delivery.
In addition to the first notice day, two other dates in a futures contract are important. These are the last notice day, which is the latest day on which the seller can deliver commodities to the buyer, and the last trading day, the day after which commodities must be delivered for any futures contracts that remain open.
A hedger who is a producer can sell futures contracts to lock in a price for their output. A hedger who is a consumer can buy futures contracts to lock in a price for their requirements.
About 30 commodities are traded in various exchanges in the U.S. Most are food products, energy products, or precious metals.
Futures contracts are risk management tools. They are not intended to serve as procurement contracts.
A common way of closing a futures position and avoiding physical delivery is to execute a roll forward to extend the contract's maturity. Brokerage firms that allow futures trading with margin accounts may require investors to substantially increase the funds in their margin accounts after first notice day, to be sure they can pay for a delivered commodity.
Conventional wisdom says that best practice for all traders is to be out two trading days before FND. This way if there are any out trades or errors, traders still have a full trading day to get any issues fixed before FND.
Traders who still want to be long can roll forward into the next month.
Derivatives contracts such as futures or forwards can be either cash-settled or physically delivered on the expiry date of the contract. When a contract is cash-settled, the net cash position of the contract on the expiry date is transferred between the buyer and the seller.
If physical delivery is required, the underlying asset tied to the contract is delivered on a predetermined date.
Here's an example of physical delivery. Assume two parties enter into a one-year (March 2019) crude oil futures contract at a futures price of $58.40. Regardless of the commodity’s spot price on the settlement date, the buyer is obligated to purchase 1,000 barrels of crude oil (unit for 1 crude oil futures contract) from the seller. If the spot price on the agreed settlement day in March is below $58.40, the long contract holder loses and the short position gains. If the spot price is above the futures price of $58.40, the long position profits, and the seller records a loss.
A futures contract is an agreement between a buyer, to purchase a certain amount of a commodity on a certain date, and a seller, to provide the commodity at that price.
Futures are a type of derivatives trading. That is, the contract is based on an underlying asset but the asset is not physically in the possession of its owner.
Futures traders generally fall into two categories:
Hedgers trade futures as a way to make sure that they have a buyer at an acceptable price for a commodity that is not yet ready for delivery no matter what happens to the market for the commodity in the intervening time.
Speculators trade in futures because they believe a commodity's value will move up or down and they hope to profit from the difference between the contract price and the actual price.
Yes. Futures trading began as a way for producers and wholesalers to reduce the risks inherent in the volatile markets for commodities such as wheat and pork. Producers had a buyer lined up in advance. Wholesalers were assured of a supply of the goods they would need for their customers. Both were guaranteed a reasonable price no matter what happened to the commodity's market price between the contract date and the delivery date.
That motive is no less relevant today than it was in 1848 when the Chicago Board of Trade opened for business.
First notice day is a stipulation in commodity futures contracts of the date after which delivery of the commodity will occur. Commodities can be settled either in cash or in physical delivery of the commodity. Traders who speculate in commodities have no interest in actually receiving the commodities that they buy or sell. The common practice is to close out the contract in cash at least two days before the first notice day.