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When we want to close out the position of futures prior to the delivery period, you will entering into the opposite trade to the original one. Equivalently, except for the P&L at the closing time, you have nothing related to this contract again.

But in the real trading, you still have two contracts and should make the delivery both of them at the maturity, and we never consider the commission, default from one of your counterparty etc. So can anyone tell me the mechanics of the closing out for a future contract in the real trading?

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When you close out a position in a stock, you don't have two stock positions, one long and one short. You just have zero position.

The same is true of futures. Your counterparty for both trades is the exchange, so when you do a round trip in a futures contract, you really do end up with no position at the end.

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  • $\begingroup$ But two contracts actually exist right? Or just transfer the long position to other one and obtain the initial margin from him(P&L on future has been got from the cash flow of previous margin)? $\endgroup$
    – A.Oreo
    Aug 3, 2017 at 5:35
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    $\begingroup$ There are two contracts - one between you and the exchange, and one between whoever takes the opposite side of the trade and the exchange. For both of you, the counterparty is the exchange. When you close out a long position, the exchange sets your position to zero, and someone else (whoever took the other side of the trade) either opens a new long position or closes out a short. All of the P&L is handled by daily margining (with the final day being a special case, in that the margin is calculated based on the price you closed out at, rather than the settlement price). $\endgroup$
    – Chris Taylor
    Aug 3, 2017 at 7:40
  • $\begingroup$ Useful, thanks. "is calculated based on the price you closed out at" -> "price you closed out" here refers to what price exactly? $\endgroup$
    – lucid_dreamer
    Mar 20, 2021 at 14:07

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