Deferred Delivery Month
What Is a Deferred Delivery Month?
In futures trading, a deferred delivery month (or "back month") is any contract month that is further out in the future than the current or "spot" month. It represents a commitment to deliver or receive the underlying asset at a later date.
In the world of futures markets, contracts are not perpetual. They expire in specific months. At any given time, there are multiple contracts available for the same commodity (e.g., Crude Oil) but with different expiration dates. The contract that expires soonest is called the "front month" or "nearby month." Any contract that expires *after* that is a "deferred delivery month" (or back month). For example, if it is January, the February contract might be the front month. The March, April, May, and December contracts are all **deferred delivery months**. Traders differentiate between them because the price of oil for delivery in February (spot demand) might be very different from the price of oil for delivery next December (future expectations).
Key Takeaways
- A deferred delivery month is any futures contract month other than the "front month" (nearest to expiration).
- These contracts are also known as "back months" or "far months."
- Traders use deferred months to hedge long-term risks or speculate on future price movements.
- Liquidity is typically lower in deferred months compared to the front month.
- The price difference between the front month and deferred months creates the "futures curve" (contango or backwardation).
- Rolling a position involves closing a front month contract and opening a deferred month contract.
Why Trade Deferred Months?
There are two main users of deferred contracts: 1. **Hedgers:** A farmer planting corn in April knows he won't harvest until October. He doesn't care about the May price; he cares about the October price. He will sell an October futures contract (a deferred month) to lock in his selling price today. Similarly, an airline might buy jet fuel futures for delivery 12 months from now to budget its costs. 2. **Speculators:** Investors might bet that a seasonal event (like a hurricane) will spike prices in the future. Or they might trade the "spread" between months, betting that the gap between the near-term price and the long-term price will widen or narrow.
The Futures Curve: Contango vs. Backwardation
The relationship between the front month and deferred months defines the market structure. * **Contango:** When deferred months are *more expensive* than the front month. This is normal for commodities because it costs money to store stuff (storage costs, insurance). The future price includes these "carrying costs." * **Backwardation:** When deferred months are *cheaper* than the front month. This happens during shortages. People are desperate for the commodity *now* (high front month price) and assume supply will normalize later (lower deferred price).
Real-World Example: Oil Market
It is March. A trader looks at the WTI Crude Oil board.
Liquidity Risks
A key consideration for retail traders is liquidity. The vast majority of trading volume happens in the front month. As you go further out into deferred months (e.g., a contract expiring in 2 years), the volume drops significantly. This results in wider bid-ask spreads, making it more expensive to enter and exit trades. Large institutional hedgers usually dominate these far-dated contracts.
FAQs
The front month is the futures contract with the expiration date closest to the current date. It is usually the most actively traded contract and serves as the benchmark price for the commodity.
Yes. As time passes and the current front month expires, the next deferred month "rolls" forward to become the new front month. This cycle continues perpetually.
Normally due to the "Cost of Carry." If you buy gold today to sell in a year, you have to pay for a vault and insurance. Therefore, the future price must be higher to compensate you for those costs (Contango).
Yes, most brokerage platforms allow you to select any available contract month. However, you must be careful with liquidity and ensure you are looking at the correct expiration date.
If you are long the front month but don't want to take physical delivery of 1,000 barrels of oil, you must sell your front month contract before it expires and buy a deferred month contract to keep your exposure. This is "rolling forward."
The Bottom Line
Deferred Delivery Months are the time machine of the futures market. The deferred delivery month is the practice of trading assets for a future date. Through this mechanism, producers and consumers may result in price certainty for long-term planning. On the other hand, these contracts can suffer from lower liquidity and complex pricing dynamics relative to the spot market. Understanding the curve of deferred prices is essential for grasping the true sentiment of the commodity markets.
More in Futures Contracts
At a Glance
Key Takeaways
- A deferred delivery month is any futures contract month other than the "front month" (nearest to expiration).
- These contracts are also known as "back months" or "far months."
- Traders use deferred months to hedge long-term risks or speculate on future price movements.
- Liquidity is typically lower in deferred months compared to the front month.