What is a deferred month’
Delayed a month or months, the last months of an option or futures contract. Pending month is a significant period for futures and options traders markets that enables market participants to distinguish different months of the contract.
Breaking down the ‘deferred month’
A futures contract is a contract for the purchase of the asset within the agreed time, the option contract gives you the opportunity but not the obligation, to buy or sell an asset at an agreed time. Futures and options contracts are popular in the markets of commodities, like oil or wheat, because producers and consumers need to protect themselves from future price fluctuations.
Futures and options markets are also popular among experienced investors, I hope to use complicated methods to trade exotic products to make a profit. One such strategy is spread trading, in which traders bet on the spread between the cost of goods in the next month and the deferred months of the contract.
For example, if it is possible, and you buy a futures contract for oil for delivery in July, then in June and July will be postponed months. The month of may will be next month. Fast forward to June. At the moment, June is next month, and now only Jul only delayed a month.
The use of pending months in the spread trade
For example, if a trader wants to bet that the price of oil will fall in the future because he expects the world economy slow, it may sell futures contracts on oil. But such bets are very risky and the trader may lose a lot of money if oil prices will remain stable or will grow.
To make the same bet, but for hedging risks of trading, the investor can take a decision on the implementation of a spread position, in which it sells oil in the next month, but buys the oil contracts in deferred months. This strategy works because price fluctuations tend to be more for the coming months and more stable in the deferred months.
For example, suppose that it is possible, and oil is trading at $60 per barrel. The trader sells short a futures contract for delivery of oil at $60 neighboring in the month of June but buys contracts for oil at $61 per barrel to be delivered in July. If the instinct of the trader is correct, and oil will fall to $55 per barrel to date, he pockets the $5 difference.
Some of this profit decreases for July delivery, the deferred month contract when the price dropped to $59 per barrel. But because price changes in the next month no more significant than the deferred month, he will continue to make money.