What Is a Deferred Month?
In the commodities futures market, the deferred month futures contract is the contract whose expiration date is farthest in the future.
For example, if a given futures contract has expiration dates in January, February, and March, the deferred month contract would be the one expiring in March.
- A deferred month futures contract is one with a relatively distant expiration date.
- By contrast, front month contracts are those which expire relatively soon.
- The term is used by futures traders when executing futures spreads and similar transactions.
How Deferred Months Work
The commodities futures markets are a large and important part of the modern financial markets. Through them, companies that rely on commodities for their production processes can source large volumes of commodities at efficient prices. At the same time, financial traders can use futures contracts to speculate on the price of commodities, and to engage in other activities such as risk hedging.
If the purchasers need commodities within a short timeframe, they can purchase front month futures contracts which expire in or near the present month. If however they wish to plan farther in advance, they can purchase deferred month contracts that expire in or near the latest month available. Although industrial buyers will typically take physical delivery of the commodities they buy, financial buyers will most often settle them for cash without taking physical delivery.
The term “deferred month” is also used in relation to options trading. Whereas futures contracts give the purchaser the right to receive a specified quantity of commodity at a predetermined time, options give the purchaser the right—but not the obligation—to purchase a specified asset at a set price within a certain period of time. In either case, the deferred month contract is simply the contract whose expiration date is farthest into the future. Since new contracts are constantly being created, the deferred month contract will change over time as old contracts expire and are replaced.
Real World Example of a Deferred Month
To illustrate, consider the case of a trader who wishes to bet that the price of oil will fall in the future. To realize this bet, this trader could sell oil futures contracts, agreeing to deliver oil in the future and receiving a set price today. In that scenario, the oil trader hopes that, by the time the delivery date is reached, the price of oil will have declined and they will therefore be able to purchase the oil more cheaply by buying from the spot market.
If this same investor wants to hedge some of the risk associated with their investment, they could execute what is known as a futures spread position. This would involve selling oil in the nearby months’ futures contracts while simultaneously buying oil in the deferred months’ contracts. In doing so, the purchase of the deferred month futures contracts acts as a hedge, reducing the investor’s potential losses if their prediction of falling oil prices fails to materialize.