Distant Months
Distant months refer to futures or options contract expirations that are furthest from the present date in a given contract series, as opposed to nearby or spot-month contracts that expire imminently. These longer-dated contracts are characterized by lower liquidity, wider bid-ask spreads, and greater price sensitivity to long-term supply-demand and interest rate expectations.
Key takeaways
- Distant-month contracts reflect the market's consensus expectation of future supply, demand, and financing costs over a longer time horizon.
- Liquidity typically decreases as contract expiration moves further out, leading to wider bid-ask spreads and greater slippage for large orders.
- The price relationship between nearby and distant months (the forward curve) reveals whether a market is in contango or backwardation.
- Commodity producers and consumers use distant-month contracts to lock in prices for future production or input needs, providing long-range hedging.
- Roll yield—the gain or loss from rolling an expiring position into a distant-month contract—is a significant component of commodity futures returns.
Explanation
In futures markets, contracts are listed for multiple expiration months simultaneously, creating a term structure of prices known as the forward curve. Distant months (also called deferred months or back months) occupy the far end of this curve and represent agreements to buy or sell an underlying asset at a specific price on a distant future settlement date—which may range from several months to several years away.
The pricing of distant-month contracts relative to spot prices is determined by the cost-of-carry model: F = S × e^(r+s-c)×T, where F is the futures price, S is the spot price, r is the risk-free rate, s is the storage cost (for physical commodities), c is the convenience yield, and T is time to expiration. When r + s > c, distant months trade at a premium to nearby months (contango). When convenience yield dominates (c > r + s), nearby prices exceed distant prices (backwardation).
For commodity hedge funds and commodity trading advisers (CTAs), the structure of the forward curve is a critical input. Rolling strategies—systematically purchasing distant-month contracts and selling them as they approach expiration—generate a roll yield that can be positive (in backwardated markets) or negative (in contango markets). During the crude oil contango of 2020, when WTI spot prices briefly turned negative, traders who had purchased storage capacity could buy spot oil cheaply and simultaneously sell distant-month contracts at $30+, locking in the contango spread as a near-riskless profit—subject to storage availability.
Options on distant months reflect longer time horizons and typically exhibit higher absolute implied volatility in price terms (more time for the underlying to move), though term structure of implied volatility varies by market. In equity options, distant-month implied volatility is often lower on an annualized basis than near-term volatility (normal term structure), reflecting mean reversion in volatility expectations. In commodity options, the volatility term structure can be inverted during supply shocks, with near-term volatility spiking well above distant-month volatility.
From a position management perspective, hedgers often prefer distant-month contracts for long-dated obligations, accepting the liquidity premium in exchange for price certainty over a longer horizon. Airlines hedging jet fuel costs two years forward, mining companies locking in copper prices for planned production, and agricultural processors fixing grain costs for future procurement all operate predominantly in distant-month contracts.
Formula
F = S × e^((r + s - c) × T)
Example
A natural gas producer plans to bring a new well online in 18 months and wants to lock in the sales price for expected production of 10,000 MMBtu per month. The nearby natural gas futures (expiring in one month) are trading at $3.20/MMBtu, while the 18-month distant-month contract is at $3.80/MMBtu—a contango structure reflecting seasonal demand patterns and market expectations of tighter winter supply in 18 months. The producer sells 10 contracts (each representing 10,000 MMBtu) of the 18-month futures at $3.80, locking in $380,000 per month in expected revenue. When production begins, if the spot price has fallen to $3.00/MMBtu, the futures position generates a $0.80/MMBtu gain offsetting the lower cash price, achieving the target revenue regardless of market price movements.
Related terms
Back Months Backwardation Basis Binary Option Contango Equity Exchange Futures Price Hedging Implied Volatility Interest Rate Liquidity