# FIFO Open/Close for Futures

Does anyone know how FIFO (first in - first out) applied in practice for futures trading? Example: T1:Date1: buy 5 contracts of XXX @ 100 (open position after the trade: +5 contracts) T2:Date1: buy 7 contracts of XXX @ 105 (open position after the trade: +12 contracts) T3:Date2: sell 9 contracts of XXX @ 106 (open position after the trade: +3 contracts) The question here is: which of open 12 contracts will be closed with the trade T3? Why, what is the rule? As far as I understand there are different possibilities to apply the FIFO: 1) FIFO ordered by Date and Time (so time also matters) 2) FIFO ordered by Date, then contracts are closed in order to minimize realized G&L 3) FIFO first within the same Date (if there are buys and sells on the same date), then as described in options 1) or 2) Does anyone know if there is a “standard” way to do it? Any hints would be much appreciated. Thank you.

How do you distinguish between 12 contracts after T2? How does it matter which futures are closed? I understand there might be some tax applications to calculate your p&l for a period, but apart from that I dont understand how can you differentiate between contracts based on their purchasing date.

Yes - First In First Out applies to the Date and Time (Trade 1 on Date 1 is the first to be liquidated)… Taking your Example: T1:Date1: buy 5 contracts of XXX @ 100 (open position after the trade: +5 contracts) … T2:Date1: buy 7 contracts of XXX @ 105 (open position after the trade: +12 contracts) T3:Date2: sell 9 contracts of XXX @ 106 (open position after the trade: +3 contracts) T3 liquidates T1 and is partial liquidation of T2… Therefore on Date 2 your live posiion is T2 3 Contracts This matching is important for realised P&L and tax implications.

Except that many buys and sells do not affect actual positions, they are simply changing hands.

They affect reaslied v non realised P&L and MTM…

Karen is right. Using correct FIFO application will liquidate the first contract on the first day, and then will liquidate the 4 of the 9 of the second contract. They do not affect the position in terms of sheer quantity, but your total notional amount is affected by the prices of the trades that still have an open quantity.

Actually, I was thinking in terms of options on futures, but it also applies to straight futures. If you open a contract, it does not get closed until expiration, even if the counter party closes the position. So, there is no impact on P&L etc, unless I’m really missing something major here.

Dreary Wrote: ------------------------------------------------------- > Actually, I was thinking in terms of options on > futures, but it also applies to straight futures. > If you open a contract, it does not get closed > until expiration, even if the counter party closes > the position. So, there is no impact on P&L etc, > unless I’m really missing something major here. Standardised futures are considered offset by Buy/Sell trades by the clearinghouse…only OTC will stay open with counterparty risk until expiration. FIFO does affect P&L as the intiating price is different on T1 and T2, therefore you will realise different amounts based on FIFO/LIFO: Example FIFO: T1: P&L = (106-100)*5*Contract Size T2: P&L = (106-105*4*Contract Size T2: Unrealised P&L = (X - 105)*3*Contract Size

KarenC, you lost me on the 5, 4, 7, and 2 above, not sure where you are getting those from. Also: > T3:Date2: sell 9 contracts of XXX @ 106 (open position after the trade: +3 contracts) trader 3 sold 9 contracts to some other trader(s), not necessarily trader 1 or 2, so why assume that those transactions are closed? Also, trader 1’s cost is \$100, so why do you set it to \$105 under LIFO, same thing with trade 2’s cost. You might be right, but I’m not following this very well, I guess.

Dreary - I assumed they were all by the same trader and T stood for a trade allotment…

ok, that explains everything, thanks.