Physical Delivery

Physical Delivery is a term used in options and futures trading in which the holder of a contract requests actual delivery of the underlying when the contract expires.

For example, when trading Nickel futures, a trader will enter a long or short trade sometime before the expiration of the Nickel futures contract.  The trader will earn and lose money on the trade during the entire timeframe of the trade until at the final day of the trade, the trader will reverse his position (long to short or short to long) which has the effect of closing out the trade, causing the trader to pocket any profit without taking any possession of the underlying product.  With Physical Delivery, the Nickel (or other futures product) futures contract holder will hold the contract to the end of the term.  He will then demand that the contract amount of the underlying product be delivered to him in actual physical form.  This type of delivery is most often used by those who use the underlying as a raw material in manufactured or produced goods rather than for pure speculation or hedging.