DEFINITION of Nearby Month
In the context of options and futures, the month closest to delivery (futures) or expiration (options). "Nearby month" is sometimes referred to as "nearest month," "front month" or "spot month." A contract for the nearby month is the shortest contract that an investor can purchase. Trading is usually most active for the nearby month as compared to deferred months.
BREAKING DOWN Nearby Month
In a normal futures market that is in contango, nearby months are less expensive than deferred months. In backwardation, futures market conditions are such that the nearby month is more expensive than deferred months. The nearby month is a key component of many options and futures trading strategies, including the calendar spread and reverse calendar spread. These strategies seek to profit from differences in pricing between the nearby month and a more distant month for the same underlying market.
In futures trading, two parties agree to buy or sell a commodity, such as gold, orange juice, pork bellies, sugar, oil, etc., at a later date. Usually, the nearby month or front month is the month in which the futures contract expires, or the month closest to its expiry. When the contract expires, the seller is expected to make delivery of the commodity, and the buyer is expected to take it.
- In the context of options and futures, the month closest to delivery (futures) or expiration (options).
- "Nearby month" is sometimes referred to as "nearest month," "front month" or "spot month."
- In a normal futures market that is in contango, nearby months are less expensive than deferred months.
- The nearby month or front month sees the most volatility in futures markets, as this is the period in which the most futures trades are taking place.
However, buyers who invest in futures rarely, if ever, actually want to buy the commodities themselves. Instead, they want to hold a position in the asset without actually holding the physical asset; this way, they can speculate on the price of the asset, owning the right to purchase or sell it in the future for a given price. Generally, the buyer wants to sell his or her interest in the commodity before the contract expires. That’s where they nearby month comes in.
The nearby month or front month sees the most volatility in futures markets, as this is the period in which the most futures trades are taking place. Futures prices converge toward the spot price or the price at which one can actually buy the commodity in question for immediate delivery, during the nearby month. Short-term traders will make or lose money on futures trades during the nearby month, as they attempt to take advantage of the price fluctuations that can occur during the nearby month. As a result, most futures trades for a given commodity will take place during the nearby month, and futures prices are typically quoted as the price of a nearby month contract. Short-term traders must be careful to sell their futures before the contract expires, or else they may be forced to take delivery of the commodity themselves.
Real World Example
A day trader in crude oil futures might purchase a futures contract agreeing to purchase 1,000 barrels of oil for $62 per barrel with a nearby month of July. This means the contract expires in July, and at that time, if the trader still holds the contract, he or she will need to take possession of 1,000 barrels of crude oil. The trader will take advantage of market volatility in the days leading up to the expiry date to attempt to his or her right to the barrels of oil at a profit before the contract expires.