What Is Near Month?
"Near month," also known as the front month or prompt month, refers to the futures contract that is closest to its expiration date in the current trading cycle. It represents the earliest available delivery or cash settlement period for a specific underlying asset, such as a commodity, currency, or financial index. This term is fundamental within derivatives trading, particularly in futures markets, where contracts are listed for various future dates. The near month contract typically exhibits the highest liquidity and trading volume compared to contracts with later expiration dates due to its immediate relevance for market participants.
History and Origin
The concept of trading for future delivery, which underpins the "near month" in modern futures contracts, has roots dating back centuries. Early forms of forward contracts existed in 13th and 14th century Europe for wool and in 17th century Japan for rice. In the United States, formalized futures trading emerged in the mid-19th century. The Chicago Board of Trade (CBOT), established in 1848, began transforming actively traded forward contracts into standardized futures contracts by 1865, initially for agricultural commodities like corn and wheat. These innovations addressed the need for producers and merchants to manage price risk and ensure supply, leading to the development of standardized contracts with specific delivery months7. As these markets evolved, the practice of referencing the contract closest to expiration as the "near month" became a common way to describe the most active and immediately relevant trading period.
Key Takeaways
- The near month is the futures contract with the closest expiration date.
- It typically has the highest trading volume and liquidity among all listed contracts for a specific asset.
- Market participants often use the near month contract for immediate price discovery, hedging, and speculation.
- Prices for the near month can significantly influence expectations for subsequent contract months.
- As the near month contract approaches expiration, its open interest and volume may shift to the next available contract month, a process known as rollover.
Interpreting the Near Month
The near month contract serves as a critical barometer for market sentiment and immediate supply-demand dynamics in commodity markets and financial markets. Its price is often considered the most current reflection of the market's view on the spot price of the underlying asset at the nearest future delivery point. Traders and analysts closely monitor the near month for real-time price discovery.
The relationship between the near month price and subsequent contract months (known as the futures curve or term structure) provides insights into market expectations. For instance, if the near month price is lower than later months, this market condition is called contango, often indicating storage costs or expected future abundance. Conversely, if the near month price is higher than later months, it suggests backwardation, which can signal immediate supply shortages or strong current demand. The movement of open interest and trading volume from the expiring near month contract to the next available contract is a routine occurrence for active traders, often referred to as rolling positions.
Hypothetical Example
Consider a hypothetical scenario for crude oil futures contracts. Suppose it is July 2025, and crude oil futures are listed for August, September, October, and subsequent months. In this situation, the August 2025 crude oil contract would be the near month.
A large oil refinery might use the August near month contract for hedging against immediate price fluctuations for crude oil they need to purchase for their operations in August. At the same time, a proprietary trading firm might engage in speculation by taking a long or short position in the August near month, betting on whether oil prices will rise or fall before the contract expires. As August draws to a close, say by mid-August, market participants who wish to maintain their exposure to crude oil futures would likely begin to "roll" their positions from the August (near month) contract to the September contract, which would then become the new near month.
Practical Applications
The near month plays a pivotal role across various aspects of investing, market analysis, and risk management. In commodity markets, it is essential for physical producers and consumers who need to lock in prices for immediate future delivery or purchase of raw materials. For example, an airline might use jet fuel futures' near month to hedge against rising fuel costs for the upcoming month's operations.
In financial markets, the near month for equity index futures or interest rate futures can be used by portfolio managers to manage short-term exposure or for tactical asset allocation adjustments. For market analysts, monitoring the near month's price movements and volume offers real-time insights into immediate market expectations. Regulatory bodies, such as the Commodity Futures Trading Commission (CFTC), oversee exchanges where these contracts trade to ensure fair and orderly markets6. The CME Group provides detailed specifications and trading codes for different contract months, including the near month, allowing market participants to precisely identify and trade the desired contract5. News outlets like Reuters provide extensive coverage and analysis of near month contract movements in various commodity markets4.
Limitations and Criticisms
While the near month is crucial for market participants seeking immediate exposure, it is subject to certain limitations and criticisms. Its high liquidity can make it attractive for short-term trading, but this also means it can be highly sensitive to sudden news events or shifts in supply and demand, leading to significant price volatility. For participants with longer-term objectives, exclusive focus on the near month can necessitate frequent rollover of positions, which can incur transaction costs and potentially expose them to negative roll yield in a contango market.
Furthermore, the price of the near month, while reflecting immediate market sentiment, may not always accurately predict longer-term trends. Factors such as changes in storage capacity, geopolitical events, or shifts in fundamental supply/demand balances can affect the entire futures curve in ways not fully captured by the near month alone. Excessive speculation in the near month could, theoretically, distort its price from underlying fundamentals, though regulatory oversight aims to mitigate such risks by ensuring market integrity and preventing manipulation3.
Near Month vs. Spot Month
The terms "near month" and "spot month" are often used interchangeably in casual conversation within futures trading, but there is a subtle distinction depending on context and specific exchange rules.
The near month always refers to the first available contract month in the trading cycle, which is typically the current calendar month if that month's contract is still actively trading. For example, if it's July, the July contract is the near month.
The spot month specifically refers to the current month's contract if it is actively trading and still capable of physical delivery or cash settlement within that same calendar month. It is the contract that is "in the spot," or immediately available. Therefore, the near month is the spot month as long as the current calendar month's contract is the closest to expiration and still trading. However, once the current month's contract approaches its final trading day or delivery period, market focus shifts, and the "near month" effectively becomes the next calendar month's contract, even if the "spot month" technically still refers to the expiring current month until its final settlement. In practice, for most active traders, the term "near month" refers to the contract that is currently the most actively traded and liquid for the closest future period.
FAQs
What happens when the near month expires?
When the near month futures contract reaches its expiration date, it ceases trading. Depending on the contract specifications, it will either be physically delivered, meaning the underlying asset is exchanged, or cash-settled, where the difference between the contract price and the final settlement price is paid out. Most traders engaging in speculation or hedging will typically "roll over" their positions to the next available contract month before the current near month expires.
Why is the near month often the most liquid?
The near month typically holds the highest liquidity because it is the most relevant for immediate price discovery, hedging needs, and short-term speculation. It represents the closest point in time for actual delivery or cash settlement, attracting the most active participation from market participants, including producers, consumers, and financial institutions.
How do I identify the near month for a futures contract?
Futures exchanges like CME Group assign unique codes to identify specific contracts by product, month, and year2. Each calendar month has a designated single-letter code (e.g., F for January, G for February, H for March, etc.)1. The near month is simply the contract with the current or upcoming calendar month's code that is closest to its expiration date. You can find this information on exchange websites or through trading platforms.
Does the near month always reflect the true supply and demand?
While the near month largely reflects immediate supply and demand dynamics, its price can also be influenced by broader market sentiment, macroeconomic factors, and the actions of large market participants. In certain conditions, such as high contango or backwardation, the near month's price might primarily reflect storage costs or immediate supply pressures rather than a long-term equilibrium.
What is a "roll" in relation to the near month?
A "roll" or "rollover" occurs when a trader closes out their position in the expiring near month futures contract and simultaneously opens a new position in a deferred (later) contract month. This action allows them to maintain their market exposure without taking or making physical delivery and is a common practice for participants who do not intend to physically exchange the underlying asset but instead wish to continue their financial exposure to the commodity or financial instrument.