Hedging with Jorge #Episode 50: LME delivery – What happens if you don’t close your futures position?

In Jorge’s blog, we’re diving into the third crucial role of the London Metal Exchange (LME): delivery. If you’ve ever wondered what happens if you don’t close your futures position on time, this one’s for you.

Let’s start with a simple scenario. Suppose you’ve taken a long position in the aluminium futures market, expecting prices to rise. Let’s say you bought aluminium futures for next week. Here’s the key rule: you must close your futures position two days before expiry.

What if you don’t close it in time?

If you forget or choose not to close it, your broker will call you. Why? Because they need to know your plan: Are you taking delivery of the metal or not?

And this brings us to the main takeaway: delivery is a real option on the LME. That means, if you’re still long when the position expires, you’ll be expected to take delivery of the physical aluminium.

Let’s crunch some numbers

Suppose you bought 100 tonnes of aluminium, which equals four lots, for $2,300 per tonne. That means you owe $230,000 to your broker. Once you make the payment, your broker will deliver to you something called a warrant.

What is a warrant?

A warrant is a certificate of deposit that proves ownership of the metal. In this case, you’ll receive four warrants, each representing 25 tonnes of aluminium.

Now comes the next big question:

Where is aluminium?

Don’t assume all 100 tonnes are sitting neatly in one warehouse near you. The LME has a network of warehouses spread across 14 countries and 32 locations. So, your metal could be anywhere within that global system.

And that’s where things get interesting and potentially complex.

Wondering what to do next with your warrants or how delivery impacts your trading strategy? Stay tuned. In the next episode of Hedging with Jorge, I’ll break it down step-by-step.

Until then, keep hedging smart!