Back Months

Derivatives & Options · basic · CC-BY-4.0

Back months (also called deferred months or distant months) refer to futures or options contracts with expiration dates that are further in the future than the nearest active contract (the 'front month'), typically exhibiting lower trading volume and open interest but capturing market expectations about supply/demand dynamics over longer time horizons. The pricing relationships between front month and back month contracts form the futures curve, whose shape (contango or backwardation) has important implications for roll yield and hedging costs.

Key takeaways

Back month contracts trade at prices reflecting the market's expectation of future spot prices adjusted for carry costs: futures price = spot × e^((r + c - y) × T), where r is the risk-free rate, c is storage cost, y is convenience yield, and T is time to expiration.
In commodity markets, back months typically trade at a premium to front months (contango) when storage costs and financing charges dominate; in supply-constrained markets, back months trade at a discount (backwardation) due to high convenience yield.
Investors in commodity ETFs that systematically roll from front month to back month contracts experience a 'roll cost' when the market is in contango—they sell the expiring contract at a lower price and buy the next at a higher price.
Back months are less liquid than front months, with wider bid-ask spreads, making large block transactions more costly to execute; institutional traders typically work back month orders over longer periods or use block trading mechanisms.
Calendar spread strategies (horizontal spreads) take simultaneous long and short positions in different expiration months, expressing views on the shape of the forward curve rather than the outright price level.

Explanation

The term structure of futures prices across contract months is one of the most information-rich signals in commodity and financial futures markets. The back months collectively form the forward curve, whose shape encodes market participants' views on future supply/demand balance, expected storage and financing costs, and the scarcity premium for immediate delivery (convenience yield). Reading the forward curve accurately is a core skill for commodity traders, hedgers, and macroeconomic analysts.

The cost-of-carry model provides the theoretical anchor for futures pricing across maturities. For a storable commodity, the futures price for delivery in T periods is: F(0,T) = S₀ × e^((r + c - y) × T), where r is the risk-free rate, c is the proportional storage cost rate, and y is the convenience yield. When storage costs and financing charges (r + c) exceed the convenience yield (y), the term structure slopes upward (contango)—each successive back month trades above the prior month. When convenience yield dominates—indicating tight immediate supply and high demand for physical delivery—the curve slopes downward (backwardation).

For commodity index investors, the shape of the back month curve determines the carry return from rolling futures exposure. In sustained contango (as in natural gas during 2009-2020), an investor maintaining a continuous long futures position by rolling monthly from front to second month continuously sells lower and buys higher, incurring a negative roll yield that can dramatically erode returns even when spot prices are rising. The S&P GSCI Natural Gas Index lost approximately 90% of its value between 2009 and 2020 while spot natural gas prices declined approximately 65%—the additional 25 percentage points of loss came from roll costs in contango. Back months therefore matter enormously for commodity investors' total returns, not just hedgers.

In fixed income futures (Treasury bonds, Eurodollar contracts), back months reflect interest rate expectations. The Eurodollar futures strip (a sequence of quarterly contracts extending up to 10 years) was the primary tool for expressing views on Fed policy before the development of SOFR futures. Traders using 'packs and bundles' (groupings of quarterly contracts) trade the average of multiple back month contracts simultaneously, expressing views on medium-term rate levels rather than any single expiration.

Formula

Back Month Futures Price: F(0,T) = S₀ × e^((r + c - y) × T)
Roll Yield = (F_near - F_far) / F_near (positive in backwardation, negative in contango)
Calendar Spread = F_back - F_front

Example

In early October, a crude oil trader observes the following NYMEX WTI futures curve: November (front month): $82.50, December: $83.10, January: $83.60, February: $84.00, March: $84.30, June (back month): $85.00. The curve is in mild contango—each successive month trades at a premium, reflecting storage costs of approximately $0.50-0.80/barrel per month and a modest convenience yield. A commodity ETF holding WTI exposure must roll from November to December contracts before expiration, selling at $82.50 and buying at $83.10—a monthly roll cost of $0.60/barrel, or approximately 0.73% of notional. Annualized, this contango costs the ETF approximately 8.7% per year in roll losses, independent of outright price changes. Meanwhile, a producer hedging 2025 production buys back month December 2025 contracts (trading at $80.20) to lock in prices, using the back months' forward price as a monetizable hedge.

Back Months

Key takeaways

Explanation

Formula

Example

Related terms