📖 What are Delivery Futures?
Delivery futures, also known as physically settled futures, are derivative contracts where the underlying asset is physically delivered at the contract's expiry. When a delivery futures contract expires, the buyer receives the actual cryptocurrency (e.g., BTC, ETH), and the seller must deliver it. This is in contrast to cash-settled futures, where the difference between the contract price and the spot price is settled in cash with no transfer of the underlying asset.
Delivery futures are more common in traditional finance (commodities, equities) but are also available on some crypto exchanges. They are used by traders who want to take physical ownership of the asset, institutions that need to manage physical inventory, or arbitrageurs who can profit from price differences between the futures and spot markets.
Delivery futures are the original futures contract — they were designed for physical delivery. In crypto, they offer a way to gain exposure to the actual asset with the added flexibility of leverage, while also allowing for physical settlement at expiry.
⚙️ How Delivery Futures Work
The mechanics of delivery futures involve the physical transfer of the underlying asset at expiry. Here's how it works step by step.
Core Mechanics
- Long Position (Buyer): At expiry, the buyer receives the underlying cryptocurrency. They must have sufficient funds to pay the agreed price (or the exchange deducts the payment from their account).
- Short Position (Seller): At expiry, the seller must deliver the underlying cryptocurrency. They must hold the asset in their account or acquire it before expiry.
- Exchange Facilitation: The exchange acts as the intermediary, ensuring that both parties fulfill their obligations. If the seller cannot deliver, the exchange may liquidate their position or charge penalties.
- Settlement Price: The settlement price is typically the spot price at the time of expiry, or a fixed price determined by the exchange.
You are long 1 BTC delivery futures contract at $60,000. At expiry, you receive 1 BTC into your spot wallet, and the $60,000 is deducted from your account. If you are short, you must deliver 1 BTC and receive $60,000.
⚖️ Delivery vs Cash-Settled Futures
The most fundamental difference between delivery and cash-settled futures is how the contract is settled at expiry. Understanding this difference is essential for choosing the right instrument.
| Feature | Delivery Futures | Cash-Settled Futures |
|---|---|---|
| Settlement | Physical asset transfer | Cash payment (difference only) |
| Asset Ownership | Buyer receives asset, seller delivers asset | No asset transfer |
| Expiry | Fixed (quarterly) | Fixed (quarterly) or perpetual |
| Requires Asset | Seller must hold asset | No asset required |
| Cost of Carry | Included in price | Not applicable |
| Popularity | Less common in crypto | Very common |
Delivery futures involve the actual transfer of the asset. Cash-settled futures involve only the difference in price. Delivery futures are more complex and carry operational risks, but they offer true physical exposure.
✅ Benefits of Delivery Futures
Delivery futures offer several advantages for certain types of traders.
Buyers receive the actual cryptocurrency, which can be used for other purposes like staking, lending, or holding.
The futures price converges to the spot price at expiry, making basis trading and arbitrage more straightforward.
Access leverage to gain exposure to the asset with less capital, while still receiving the asset at expiry.
Price discrepancies between delivery futures and spot markets can be exploited through arbitrage strategies.
⚠️ Risks of Delivery Futures
Delivery futures come with additional risks beyond those of cash-settled futures.
Sellers must hold the asset to deliver. If they don't, they may face penalties or forced liquidation. Buyers must have sufficient funds to pay for the asset.
Managing physical delivery involves operational complexity, including ensuring the asset is available and the transfer is executed correctly.
Crypto markets are volatile. The price at expiry can be unfavourable, affecting the value of the delivered asset.
Delivery futures may have lower liquidity than perpetual or cash-settled futures, leading to wider spreads and slippage.
The cost of holding the asset (storage, insurance, opportunity cost) can affect the futures price and the profitability of strategies.
The exchange acts as the counterparty. If the exchange faces operational issues, delivery may be delayed or compromised.
Delivery futures are more complex than cash-settled futures. They require additional operational planning and carry the risk of not being able to deliver or receive the asset. They are not suitable for all traders.
📈 Strategies with Delivery Futures
Delivery futures are used in several specialised trading strategies.
Profit from the difference between the futures price and the spot price. Buy spot and sell futures (or vice versa) to capture the basis as it converges to zero at expiry.
Use delivery futures to hedge spot positions. If you hold BTC spot and are concerned about a price drop, sell BTC delivery futures to offset the loss.
Use delivery futures to acquire the asset at a future date with the benefit of leverage, and receive the asset at expiry.
Exploit price discrepancies between delivery futures on different exchanges or between delivery and cash-settled futures.
Basis trading is one of the most common strategies for delivery futures. It is a low-risk, market-neutral strategy that captures the premium of futures over spot. However, it requires careful monitoring and management of delivery risk.
🚀 How to Start Trading Delivery Futures
Follow these steps to start trading delivery futures on a crypto exchange.
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1
Choose an Exchange Offering Delivery Futures
Not all exchanges offer delivery futures. Check platforms like Binance, OKX, or Kraken for physically settled futures contracts.
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2
Complete KYC and Enable Futures
Complete identity verification and enable futures trading in your account settings.
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3
Transfer Funds and/or Assets
Move funds to your futures wallet for margin. If you plan to be a seller, ensure you hold the asset you will deliver.
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4
Choose Your Contract
Select the delivery futures contract you want to trade. Pay attention to the expiry date and delivery mechanics.
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5
Set Leverage
Choose your leverage. Delivery futures typically allow lower leverage than perpetuals.
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6
Place Your Trade
Decide on long or short. Set a stop-loss to limit risk. Enter the order.
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7
Monitor Delivery
Monitor your position as expiry approaches. Ensure you have the required funds (for buyers) or assets (for sellers) to fulfill the delivery obligation.
If you are not ready for physical delivery, close your position before expiry. This avoids the operational complexity and risk of physical delivery. Most traders close their positions before expiry rather than taking delivery.
❌ Common Mistakes in Delivery Futures Trading
Avoid these errors that can lead to significant losses or operational issues.
- Not closing before expiry. If you don't want physical delivery, you must close your position before expiry. Otherwise, you are obligated to deliver or receive the asset.
- Not holding the asset for delivery. If you are short and don't hold the asset, you may face penalties or forced liquidation.
- Not having sufficient funds. If you are long, you need sufficient funds to pay for the asset at expiry. If not, your position may be liquidated.
- Ignoring delivery fees. Exchanges may charge fees for physical delivery. Factor these into your cost calculations.
- Using too much leverage. High leverage amplifies losses and increases the risk of not being able to fulfill the delivery obligation.
- Not understanding the delivery process. The delivery process varies by exchange. Understand the specific mechanics before trading.
Holding a delivery futures contract to expiry without intending to take delivery. If you don't want the asset, close the position before expiry. Failing to do so can result in forced delivery, operational issues, and unexpected costs.