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Hello, and thanks in advance for your insight. I have been trading spot FX for years but have recently ventured into trading futures as well and am practicing with a Thinkorswim paper-trading account. Several days ago, I bought 2 contracts of /CL at the 56.87 mark (expiring Jan. 18). I was profiting nicely, but last night at exactly midnight both contracts were closed at price 0, for a loss of over a hundred thousand (simulated) dollars.
I assume this is just a glitch in the ToS trade simulator, but it is disconcerting nonetheless. Obviously, the mark didn't drop to 0, and the charts reflect this fact.
Has anyone else experienced this? Am I the victim of a glitch or my own ignorance (I am very new to futures)?
Thanks again and best regards.
Can you help answer these questions from other members on NexusFi?
Thank you, shzhning. I clearly have much to learn about futures. I thought that I could hold a contract until expiration and then settle it.
So, if I hold a long contract after its last trade day, it assumes a value of 0 and I lose the difference between the last market price and 0? That seems somewhat extreme. Should it not have closed the contracts at the market value at that time (~58)?
Thank you as well, kevinkdog. I learned long ago not to view demo trading as corresponding 1:1 with live trading, but have been mostly using ToS paper-trading to familiarize myself with the mechanics of the platform (trade entry, position management, etc.). It is vastly different than what I'm used to using for Forex alone (MT4). When I go live with ToS, I will certainly proceed with extreme caution. I would be fairly despondent had this happened with real money. ~$6k in margin and a decent profit turned to a $100k+ loss overnight would be downright depressing.
Most brokers would have had you out of January and into Feb a few days before 12/19. Different months trade differently, so your Jan contract paper profit might not have even been the same in feb contract.
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Some contracts financially settle, some don't. Crude is physically settled. If your broker allowed you to you would now have 2000 bbls of crude sitting in a tank in Cushing Oklahoma!
@kevinkdog and @SMCJB answered the question correctly, but just to add some context that you may need:
Trading the futures to capture a profit due to price fluctuations is one thing. But you probably don't really want to actually receive (and pay for) any amount of actual crude oil. Some participants in the market do, of course. They want to buy actual physical crude oil, because they are in some business where they have a need for it, and they are in the futures market to lock in the price they will have to pay.
But you and I probably do not have the kind of money to actually pay for the amount of physical oil that your futures contracts represent, nor do we have any use for the stuff. We are not, after all, running a refinery or something .
Your margin deposit, which is a tiny fraction of the price of the crude that your futures represent, only serves as a surety deposit that will, if needed, make good on a loss if the price goes against you. All accounts are marked to market at the end of the day (or when a position is closed), and if you have a loss it is charged against you, and if you have a profit it is credited. But this just keeps everything straight prior to settlement, which involves actual receipt of -- and full payment for -- the physical commodity. The payment required is going to be pretty significant, and a lot more than your margin.
When the contract goes to settlement, you are going to have to have the full dollar amount required to purchase the amount of crude that you have committed to. That may be a huge amount of money.
At settlement, if you are able to pay for it, you will become the proud owner of a certain number of barrels of crude oil in the depository (in Cushing, Oklahoma), and your account will be charged for the full amount of the purchase.
Of course, any buyer who doesn't have the money in their account to pay for it, and any seller who doesn't actually own enough in the depository to sell it, won't be able to go forward to settlement. (And sure doesn't want to....)
I think that describes you . Or me, for that matter.
You have run into the distinction between what is traditionally called "speculators" (you and me, trading on price fluctuations but who are not directly in the petroleum business and don't want to really buy or sell the stuff) and "commercials" (traders or firms who are actually in the business of buying or selling real physical petroleum, and who have some use for it after they get it. Maybe they resell it, maybe the refine it, maybe they do something else with it.)
Also, generally traders will handle the rollover by selling the expiring and buying the new contract:
The point is that you cannot take delivery unless you really are prepared to do so, which I assume you are not.
Thank you very much, Bob. That is one of the most concise and helpful explanations I have come across. You have made it much clearer and I now fully understand what happened with my trade. Futures are certainly a world apart from spot FX, but I am greatly enjoying the learning process. I'm sure I will lean on your expertise again as I dive deeper into this. Thanks again, Bob, and all who commented. I truly appreciate it.