Commodities

Front Month

Gayathri G | Updated on January 22, 2018

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Used in the context of options and futures, the term Front Month means the month closest to delivery (futures) or expiration (options) - which is often in the same month.

Also called Nearby month or Spot month, it is the shortest time frame in which an investor can purchase the contract. Trading is usually most active for the nearby month as compared to deferred or far months.

A contract with a front month is more liquid than other types of futures contracts due to the relatively small gap that exists between the spot price of the commodity that underlay the contract and futures price.

Use of front month contracts requires an increased level of care as the delivery date may lapse shortly after purchase, requiring the buyer/seller to actually receive/ deliver the contracted commodity.

A front month contract is more likely to be employed with agricultural crops.

Base / precious metals futures have no near month. For instance, the Coriander or Dhaniya contract on the NCDEX has a near month on September 1 and the expiry date is September 18.

Similarly, gold and steel contracts do not have a near month specified but their expiry dates are September 28 and September 18 respectively on the NCDEX.

Globally, expiration dates on these types of contracts occur during the last month of each quarter of any given calendar year.

This means that if reports released in May indicate that corn is down; it is referring to the anticipated price that will be in place during the month of June.

An investor may assume that the price will not drop further in the interim, but will actually increase by the time the contract is actually sold at the end of the quarter, and purchase the commodity now rather than later.

Published on September 09, 2015

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