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A front month is a term that is used in futures trading, and refers to the month specified in a futures contract that is closest to the current date. This means that the front month is the shortest time frame in which the contract could be purchased. When the current date and the expiration date are not contained in the same calendar month, the contract is usually referred to as a back month contract rather than a front month contract.
In most situations, a contract with a front month is considered to be somewhat more liquid that other types of futures contracts. Part of this is due to the relatively small gap that exists between the spot price of the commodity or commodities that underlay the contract and the futures price. While this does mean a short duration for the contract itself, it also means that there is a need to evaluate the potential of the contract very closely, with particular attention to market movements and other events that are likely to affect the value of the investment over the next few weeks.
The short duration of the front month approach has led to this sort of investment strategy sometimes being known as a near delivery month contract. As the name implies, the contract is a short-term arrangement that is likely to be settled in short order. In some circles, the front month is also known as the spot month, owing to the small gap that separates the spot price and the futures price associated with the agreement.
One example of a situation in which a front month contract is likely to be employed is with corn futures. Typically, expiration dates on these types of contracts occur during the last month of each quarter of any given calendar year. This means that if reports released in May indicate that corn is down, they are referring to the anticipated price that will be in place during the month of June. An investor may choose to assume that the price will not drop further in the interim, but will actually increase by the time the futures contract is actually sold at the end of the quarter, and purchase the commodity now rather than later. If the price of corn should increase by the time of the expiration date on the contract, the investor stands to earn a return without committing his or her resources over a long period of time. As with any investment, there is the chance that something would cause the price of corn to decrease, which would result in a loss for the holder of the futures contract.
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