What is the front futures contract?

December 24, 2008

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John Forman - The Essentials of Trading author

The other day I got a question about futures contracts from a member of my mailing list on a subject which I’m sure others have as well.

I am in the progress of learning the details about Futures right now. On the web I’ve lately (first half of December) seen someone refer to the Feb 09 contract of YG as the “front month” contract. I would think that the front month is rather Jan 09 (or even Dec 08, although time is running out). But I also noticed that the Jan 09 contract has very low volume compared to the Feb 09 contract. Is there some special reason I do not see why this is the case?

Also, the software of my broker – Trader Workstation of Interactive Brokers – has asked me if I would like to roll over the Jan 09 contract to the contract with the next expiry as expiration would be close (or something like that). This confuses me slightly since the expiration date of the Jan 09 contract is Jan 28 2009.

The “front” futures contract is generally going to be the one with the highest open interest. In financial futures (S&Ps, bonds, etc.) where the contracts are on a quarterly schedule, the front contract will generally be the nearest one until close to its expiration. You will see people rolling from the nearby to the next contract about a week (give or take) ahead of the nearby contract expiring. Eurodollar futures are an exception as their front contract is usually 2-3 quarters out.

Things are different in actual commodities where it varies a bit more. I’m no expert in that area, and I really don’t know why certain contract months are very active and others are very thin, especially when they are next to each other on the calendar. It has to do with the production cycle (or other seasonal elements) of the product in question. For example, crops are harvested at certain times of year, so it should come as no surprise that those monts are more active than others. You’ll want to do specific research into the commodity you would be interested in trading to learn the details for those contracts.