This sounds even more weird.
I could maybe understand you transferring the contract within a day, but closing it?
What I mean is that most futures traders hold their contracts for a very short time. For example, when I trade the S&P futures, my average holding time is about 15 minutes. Most traders exit and re-enter futures trades many times in the day and most of them flatten all positions before the end of the day.
What does that even mean?
Say you contract with me to take delivery of 10,000 pork bellies on 1st december.
How do you "close" that? Is there some default you pay?
A trader closes a long contract by selling a contract and a short contract by buying a contract.
Or have you already paid me for the bellies when you "opened" the contract, and "closing" it merely means telling me I can keep the cash but please do not actually send you the bellies?
I could understand you selling the delivery to someone else, so come dec 1st you'll tell me hey by the way here is my new shipping address, so-and-so will be there waiting for the bellies instead of me".
But "closing"? I don't understand... if everyone is doing that, can I basically just eat my bellies and contract to deliver them too, knowing no one is ever actually going to take delivery so I might as well eat them myself, no one will even care?
I thought the "hedging" part of futures was (a) I know I got paid for my bellies so I can use the money to buy food for the pigs so as to create the bellies; and (b) you know how much the bellies you'll be taking delivery of in december cost long before december.
95 to 99% of futures contracts are closed by the trader before delivery date. Physical delivery is rare and occurs electronically. i.e. gold in a depository, etc.
Futures are mark to market, i.e. The difference in value is settled at the end of every day.
http://en.wikipedia.org/wiki/Futures_contract
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