Closing Out a Position
Closing out a futures position means entering an equal and offsetting trade in the same contract to bring net exposure to zero. A long position is closed by selling the same contract; a short is closed by buying it back. Closing out is the standard way to exit a futures trade because more than ninety-five per cent of contracts never reach physical or final cash delivery. After close-out, any remaining margin balance is returned to the trader and no further variation margin flows occur.
Why it matters
A futures account is not a portfolio of distinct contracts in the legal sense. The clearing house nets exposures by contract month and underlying. When a trader who is long 5 June wheat futures sells 5 June wheat futures at any later time, the net position becomes zero and the trades cancel one another in the clearing system. The trader walks away with the cumulative profit or loss already settled through daily variation margin. Closing out converts a directional bet into realised cash by transferring the obligation to a new counterparty, not by negotiating with the original one.
Formulas
Worked examples
A trader is long 5 June ASX wheat futures opened at A$340 per tonne. Two months later, she wants to exit. The current June futures price is A$365.
She sells 5 June ASX wheat futures at A$365. Net position is now zero. Cumulative profit , already credited through daily variation margin over the holding period. Initial margin is released back to her account.
A speculator is short 10 December ASX SPI 200 futures opened at 7,500 with multiplier A$25. The SPI 200 has rallied and December futures now trade at 7,700.
He buys 10 December SPI 200 futures at 7,700 to close out. Realised loss A$50,000, which has already drained the margin account through variation margin. The remaining balance, plus released initial margin, is paid out after settlement.
Common mistakes
- ✗You must hold until expiry to exit a futures position. Less than five per cent of open contracts reach delivery on most exchanges. Closing out is the default exit for both speculators and hedgers.
- ✗Closing out requires the original counterparty. The clearing house novates trades, so the original counterparty is irrelevant. Closing out enters a new trade in the open market, and the clearing house nets the position internally.
- ✗Closing out costs nothing. Each leg pays brokerage and exchange fees, and the bid-ask spread may move against the trader on the close-out leg. These costs are usually small relative to the position size but matter for high-frequency trading strategies.
Revision bullets
- •Exit by entering an equal and opposite trade in the same contract
- •Long closes by selling, short closes by buying back
- •More than $95\%$ of contracts are closed before expiry
- •Released initial margin returned to the trader after close-out
- •Clearing house nets positions automatically by contract month
Quick check
To close out a short futures position, a trader:
Approximately what fraction of futures contracts go to physical or final cash settlement?
Connected topics
In learning paths
Sources
- Hull, John C. Options, Futures, and Other Derivatives. 11th ed. Pearson, 2022. ISBN 978-0-13-693997-9.Explains close-out via offsetting trades and the role of the clearing house in net position management.
- CME Group. Closing and Offsetting a Futures Position. CME Group Education, 2024.Practitioner explainer with the well-cited statistic that under five per cent of futures contracts proceed to delivery.
- Australian Securities Exchange. ASX Clear (Futures) Operating Rules and Procedures. ASX, 2024.Defines how the Australian central counterparty nets positions and processes close-out of futures contracts.