Contract Month

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.

Understanding Futures

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.

RELATED TERMS
  1. Current Delivery

    A type of futures contract that requires the delivery of the ...
  2. Delivery Price

    The financial value of the conveyance of the underlying commodities ...
  3. Delivery Month

    A key characteristic of a futures contract that designates when ...
  4. Back Months

    The available futures contracts for a particular commodity that ...
  5. Delivery Date

    1. The final date by which the underlying commodity for a futures ...
  6. Physical Delivery

    Term in an options or futures contract which requires the actual ...
Related Articles
  1. Markets

    Crude Oil Prices: Comparing Future Price Vs. Current Market Price

    Discover the differences between oil futures market prices and oil spot market prices and what leads to the differences between the two.
  2. Trading

    The Difference Between Forwards and Futures

    Both forward and futures contracts allow investors to buy or sell an asset at a specific time and price.
  3. Markets

    Investing in Crude Oil Futures: The Risks and Rewards

    Learn about the risks and rewards of trading oil futures contracts. Read about a few strategies to limit the risk in trading oil futures contracts.
  4. Investing

    Options on Futures

    Options on futures contracts offer another way for day traders to use options. These are traded on the same exchange as the underlying futures contract. Traders should take care to understand ...
  5. ETFs & Mutual Funds

    3 Reasons to Use ETF Options Over Futures (SPY, QQQ)

    Learn about exchange-traded fund (ETF) options and index futures, and why it might be a better decision to use ETF options instead of futures.
  6. Investing

    What is a Forward Contract?

    A forward contract is a customized contract between two parties to buy or sell an asset at a specified price on a future date.
  7. ETFs & Mutual Funds

    UNG Vs. UGA: Comparing Gas ETFs

    Discover the main similarities and differences between two major energy sector ETFs: The United States Natural Gas Fund and The United States Gasoline Fund.
  8. Markets

    Trading Gold And Silver Futures Contracts

    If you are a hedger or a speculator, gold and silver futures contracts offer a world of profit-making opportunities.
  9. Markets

    How to Trade Options on Government Bonds

    A look at trading options on debt instruments, like U.S. Treasury bonds and other government securities.
  10. Trading

    An Introduction To Trading Forex Futures

    We explain what forex futures are, where they are traded, and the tools you need to successfully trade these derivatives.
RELATED FAQS
  1. How do I learn technical skills for trading commodities?

    Learn what resources are available to learn about trading commodities, and understand some of the differences between stocks ... Read Answer >>
  2. How do futures contracts roll over?

    Learn about why futures contracts are often rolled over into forward month contracts prior to expiration, and understand ... Read Answer >>
  3. What is the difference between forward and futures contracts?

    Fundamentally, forward and futures contracts have the same function: both types of contracts allow people to buy or sell ... Read Answer >>
  4. How can a futures trader exit a position prior to expiration?

    A futures contract is an agreement to buy or sell a commodity at a pre-determined price and quantity at a future date in ... Read Answer >>
  5. What does it mean to roll a derivative contract?

    Find out more about derivative securities, how to roll forward a derivative contract and what it means when a derivative ... Read Answer >>
  6. How can I calculate the notional value of a futures contract?

    Learn how the notional value of a futures contract is calculated, and how futures are different from stock since they have ... Read Answer >>
Hot Definitions
  1. GBP

    The abbreviation for the British pound sterling, the official currency of the United Kingdom, the British Overseas Territories ...
  2. Diversification

    A risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique ...
  3. European Union - EU

    A group of European countries that participates in the world economy as one economic unit and operates under one official ...
  4. Sell-Off

    The rapid selling of securities, such as stocks, bonds and commodities. The increase in supply leads to a decline in the ...
  5. Brazil, Russia, India And China - BRIC

    An acronym for the economies of Brazil, Russia, India and China combined. It has been speculated that by 2050 these four ...
  6. Brexit

    The Brexit, an abbreviation of "British exit" that mirrors the term Grexit, refers to the possibility of Britain's withdrawal ...
Trading Center