What Is a Nearby Month
In the context of options and futures, a nearby month is month closest to delivery, for futures contracts, or to expiration, for options contracts. "Nearby month" is sometimes referred to as "nearest month," "front month," "near 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.
- A nearby month is the month closest to delivery, for futures contracts, or expiration, for options contracts.
- "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.
Understanding Nearby 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 a normal futures market that is in contango, nearby months are less expensive than deferred months. If the futures market is in backwardation, the nearby month is more 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. Futures prices converge toward the spot price or the price at which one can actually buy the underlying commodity for immediate delivery, during the nearby month.
How to Invest Around Nearby Months
In futures trading, two parties agree to buy or sell a commodity, such as orange juice, pork bellies, sugar, or oil, 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 possession.
However, futures traders rarely want to own the commodities themselves, which can incur expensive storage costs. Instead, they want to hold a position in the asset without physical possession. 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 their interest in the commodity before the contract expires.
Since futures traders do not want to take possession of their commodities, trading activity tends to increase as the date of delivery approaches. Short-term traders will make or lose money on futures trades during the nearby month, as they attempt to take advantage of these price fluctuations.
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.
Example of Nearby Month
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, they 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 sell their right to the barrels of oil at a profit before the contract expires.
Short-term trading can lead to unexpected volatility during the nearby month. In extreme cases, futures prices can collapse prior to delivery, particularly if the costs of storing the commodity exceed the expected demand. In April of 2021, the May contract for WTI crude oil futures fell below zero, due to falling demand and overproduction. Because of the high cost of storing crude oil, traders raced to unload their futures contracts before they expired, ultimately paying oil companies to accept delivery.