Contract Specifications and Delivery

Say "I'll buy oil from you in three months" and you've said almost nothing useful — how much oil, what grade, delivered where, in what month exactly, and settled how? A futures contract only works as a standardized, exchange-traded instrument because every one of those blanks is filled in identically for every trader, every time. That filled-in fine print is the contract specification, and it's what makes a futures contract fungible: your long position and a stranger's short position on the same contract are perfectly interchangeable.

The blanks that get filled in

Every futures contract specifies, at minimum: the contract size (e.g., 1,000 barrels of crude oil, or $100,000 face value of a bond), the tick size (the smallest allowed price increment, which sets the dollar value of a one-tick move), the delivery month (contracts trade in a fixed cycle — March, June, September, December, say — rather than any date), and, for physically-settled contracts, the grade and delivery point — the exact quality specification and location the underlying must meet. A crude oil contract, for instance, specifies not just "oil" but a particular benchmark grade delivered to a particular storage hub.

What happens at expiry

Most futures traders never touch delivery — they close out or roll their position before the contract expires. But the contract still needs a rule for what happens if someone holds to expiry. Some contracts are cash-settled: the exchange simply computes a final settlement price from a reference index and pays the difference in cash, no physical exchange occurs (most equity index and interest-rate futures work this way). Others are physically settled: the short is obligated to deliver the actual underlying — barrels of oil, bushels of wheat, or bonds — to the long, at the specified grade and location, and the long must pay for and accept it.

A concrete example

A trader long one crude oil futures contract into expiry who does not offset the position can find themselves obligated to accept delivery of 1,000 barrels of physical oil at a specific storage terminal, with all the logistics (tank space, transport, quality inspection) that implies. This is precisely why most speculative traders roll their position into the next delivery month days or weeks before expiry — delivery is designed for commercial hedgers (refiners, producers) who actually want or have the physical commodity, not for a fund manager with no way to take a tanker of oil.

What this means in practice

Contract specifications determine liquidity concentration: because everyone trades the same standardized size, tick, and delivery cycle, volume pools into a small number of contract months rather than spreading across arbitrary dates, which is exactly what makes futures markets deep enough to trade in size. Anyone building a systematic strategy on futures needs to know the roll schedule and delivery rules cold — getting caught holding a physically-settled contract past its last trading day is an operational failure, not a market-risk one.