DEFINITION of 'Contract Month'
The contract month is the month in which a futures contract expires. The contract can be delivered during the current month, provided the terms and conditions set forth in the contract are met. Either delivery or expiration must take place to settle the contract. It is also known as the delivery month.
BREAKING DOWN 'Contract Month'
Futures contracts are similar to options contracts in that they are only valid for a specified length of time. Then the contract either expires or must be delivered. In instances where the delivery takes place in that month, the contract month is also known as the delivery month.
Futures are investments based on the buying or selling of a commodity or stock on a specified date in the future. The futures contract is the legally binding agreement that states the timeframe when the aforementioned purchase or sale must take place. The contract is satisfied when the involved parties make and accept the delivery on the specified date. The month in which the agreement must be satisfied is considered the contract month.
Futures are based on the anticipated value of a commodity at a future date. They involve two positions known as the long and the short. The long position is held by the entity that agrees to buy a particular stock when the contract expires. The short position is held by the entity that agrees to sell when the contract expires. The position an investor takes depends on whether he believes the value of said stock or commodity will go up or down. When the belief is the price will go higher when the contract expires, the desired position is to go long. If the belief is the price will go lower, the investor prefers to go short.
Example of How Futures Work
An example of futures in the marketplace is within the oil market. If the current price of oil is $100 per barrel, a future involves the purchase of oil from an oil company that has yet to be produced at the current price. For example, an investor may choose to buy a barrel of oil, with a contract or delivery date one month away, for the current price of $100. When the contract month arrives, the oil must be delivered by the oil company and it must be accepted by the investor.
Do Commodity Deliveries Actually Take Place
The majority of the time, the delivery of the commodities as specified in the transaction do not actually take place. This is due to the fact the futures market allows for hedging without additional contract negotiation. Essentially, this allows a producer to offset a current future to avoid the costs of having to complete a physical delivery of said items.