What Is a Delivery Month?
The term delivery month refers to a key characteristic of a futures contract that designates when the contract expires, and when the underlying asset must be delivered or settled. The exchange on which the futures contract is traded also establishes a delivery location and the date within the delivery month when the delivery can take place.
A delivery month is the month when a futures contract expires, and the asset must be delivered or settled at that time. Exchanges are fundamental in setting the locations and dates. Many futures contracts don’t need physical delivery of a commodity. They’re often settled in cash. The delivery month of a derivative may also be called the contract month. They can be specific to certain commodities, like cocoa.
Traders can align month codes and delivery months to avoid unintended positions, exiting a position before the delivery month to avoid physical delivery.
Key Takeaways
- Delivery months play a crucial role in futures contracts, marking when these agreements expire and when the underlying asset must be delivered or settled.
- Not all futures contracts mandate the physical delivery of a commodity; many are settled in cash, reflecting the flexibility in futures trading.
- The delivery month is represented by a specific letter in the contract symbol, ranging from “F” for January to “Z” for December, helping traders quickly identify the delivery timeline.
- Traders are encouraged to exit their positions close to the delivery month to avoid the obligation of taking or making the physical delivery of the underlying asset.
- Understanding the coding system of delivery months in futures contracts helps traders avoid confusion and enhances effective communication in the trading pit.
How Delivery Months Work in Futures Contracts
Futures contracts are agreements between two parties to buy or sell an asset such as a commodity or currency at a predetermined date in the future. The buyer agrees to buy the underlying asset upon expiration, while the seller agrees to relinquish it at that point. Some commodities can be delivered in any month, while others can only be delivered in certain months. The delivery month is simply the month stipulated in a futures contract for cash settlement or for physical delivery. Commodities are any good for which there is a demand. This includes anything from stocks and bonds to precious metals, oil, corn, sugar, and soybeans.
If a futures trader wants to offset or liquidate a position, the delivery months must match. Most futures positions are excited prior to the delivery month, so the contracts that are close to delivery often see the most volume and set the current price of the underlying commodity. If they don’t match, the trader ends up long one month and short a different month instead of canceling out the position.
For instance, cocoa will only have delivery months occurring in March, May, July, September, or December. This means if you do not exit your position by the end of the month before the contract’s expiration, you must take physical delivery of the cocoa—or the commodity in question. Certain commodities, as noted above, can be delivered year-round.
Important
Traders must exit their position by the end of the month before the expiration or take a physical delivery of the commodity.
Decoding Delivery Month Symbols in Futures
A single letter represents delivery months in contracts, starting with January (“F”) and ending with December (“Z”).
Since futures contracts are traded on exchanges, the exchange will display the delivery date. This is the final date by which the futures contract for a commodity must be delivered. A letter on the ticker indicates the delivery date. The coding runs alphabetically, with “Z” for December. Although letters are omitted, the coding system runs in alphabetical order with “Z,” for example, corresponding with December:
- January: F
- February: G
- March: H
- April: J
- May: K
- June: M
- July: N
- August: Q
- September: U
- October: V
- November: X
- December: Z
A full futures contract ticker symbol includes a two-character commodity code, a single-letter month, and a two-digit year. CCZ18, for instance, indicates a cocoa contract for delivery in December 2018.
Month letter codes are traditional. Letters representing actions like bid (B) and ask (A) or confusing ones like C, D, and E were removed. Add in the removal of I and L, which can be easily mistaken when written, and you are more or less at the current list. The true story doesn’t really matter as long as traders and brokers in the pit know what delivery month they are talking about.
The Bottom Line
The delivery month is a critical feature of futures contracts, determining when the contracts expire and when the underlying assets must be settled or delivered. Delivery months are symbolized by specific letters in contract symbols, impacting contract identifiers and trading strategies.
Not all futures contracts require physical delivery. Many are settled in cash. The alphabetical coding of delivery months enhances understanding and avoids confusion. Commodities like cocoa have specific delivery months, and traders must align their strategies accordingly.
Traders can exit their positions near the delivery month to avoid the obligation of taking or making delivery of the underlying asset.