A  Dive Into Futures Contracts

We’ll go over what commodity futures contracts are, why they are traded in different months, and more in the sections that follow.

What Are Commodity Futures Contracts

The term commodity refers to a good in demand. Any movable or commercial item that is bought and sold is considered one. Commodities include equities, bonds, sugar, corn, and gold to name a few. 

A standard contractual agreement between two parties to purchase or sell a commodity at a later time is known as a commodity futures contract. Only through a public auction where traders submit bids and offers in a competitive market can a futures contract trade on an exchange. When two parties agree on a price for the commodities futures contract, a transaction is made. Every futures contract has certain characteristics, just like every traded share of stock does. 

The gold futures contract is one instance. The normal gold contract weighs 100 troy ounces, and the product must adhere to strict grade and quality requirements. The CME’s gold futures contracts are all fungible, meaning that traders are aware of their standardized features.

Understanding Futures Months

There is a delivery month for each commodity futures contract, and these months can be carried forward for years. The commodity must be supplied when futures contracts expire because traders are dealing futures rather than the real physical commodity. An oil futures contract, for instance, may trade in September 2018, December 2018, March 2019, and so on. If you purchase the September 2018 oil future (long 1 GLCU1), you will receive the crude oil at the expiration of the contract in late August.

Delivery and Expiration

After the contract month ends, deliveries will be made or received on any open futures positions. Nevertheless, the majority of speculators will close out their positions for that month prior to delivery because they are not interested in producing or accepting delivery of the commodity. Few traders ever make or receive delivery on futures contracts, and most traders close positions prior to delivery.

In addition to the terms of the contract, the parties involved in a futures trade also agree on the delivery date or month. Trading soybean futures, for instance, entails trading a future delivery month. The month indicates the soybean contract’s expiration date, which is when the trader needs to liquidate his position or accept delivery.

Front Month

The month with the highest trading volume and liquidity is known as the front month. In addition, it is the month that is typically brought up when discussing the commodity’s price. The front month is typically a close-by month that “rolls” or shifts a few times a year. There are several contracts with varying delivery months. A simple method to figure out when the front month is to simply look at the volume and the contract month’s expiration date.

Symbols of Futures Contracts

Finally, a letter is used to symbolize each month that is mentioned in the contract. For the futures industry, this is the accepted practice. The following table lists the symbol associated with every month in futures trading: 

Jan	F	Jul	N
Feb	G	Aug	Q
Mar	H	Sep	U
Apr	J	Oct	V
May	K	Nov	X
Jun	M	Dec	Z

Summary

You can determine if trading futures is suited for you after you grasp the fundamentals. A commodity futures contract’s various months simply indicate the contract’s expiration date.

Gaining confidence and utilizing the futures markets can be facilitated for traders, hedgers, and investors by being aware of their technical features.