TL;DRThe process of fulfilling a futures contract at expiration. Cash-settled contracts pay the difference in cash. Physically-settled contracts require actual transfer of the underlying commodity.
Delivery is the final settlement process when a futures contract expires. Physical delivery means the actual commodity changes hands. Cash settlement means the price difference is paid in cash with no physical goods exchanged.
Physically-settled contracts include crude oil (CL), gold (GC), corn (ZC), soybeans (ZS), and most agricultural and energy products.
If you hold a long CL contract through expiration, you are legally obligated to take delivery of 1,000 barrels of crude oil. Retail traders almost never want this. Brokers warn you and auto-close positions well before delivery begins.
Cash-settled contracts include equity index futures (ES, NQ, RTY, YM). At expiration, the exchange calculates the final settlement value and credits or debits your account.
If you're long 1 ES at 5,200 and the final settlement is 5,250, you receive $2,500. No shares change hands. Cash settlement is why equity index futures are popular with speculators.
Cash settlement on ES
Long 1 ES at 5,200. Final settlement value is 5,235.
Account credited 35 points x $50 = $1,750. Contract ceases to exist. Open a new contract to maintain exposure.
Physical delivery avoided
A trader forgets to close a long CL position before the delivery deadline.
The broker auto-closes at market price, which may be unfavorable. Entirely avoidable by rolling or closing before expiration.
Holding a physically-settled contract too close to expiration
Know the first notice day and last trading day. Close or roll well before those dates.
Assuming all futures are cash-settled
ES and NQ are cash-settled. CL, GC, ZC are physically-settled. Check the specs.
Ignoring broker deadlines for position closure
Brokers often set their own deadlines stricter than the exchange's. Check the policy for each product.