Contract Months
Understanding Contract Months in Crypto Trading
Welcome to the world of cryptocurrency trading! If you’re just starting out, you’ll quickly encounter terms that might sound confusing. One of those is “contract months.” This guide will break down what contract months are, why they matter, and how they affect your trading decisions. We'll focus on cryptocurrency futures and perpetual contracts, as contract months are most relevant to these.
What are Futures Contracts?
Before diving into contract months, let's quickly understand futures contracts. Think of a futures contract as an agreement to buy or sell a specific amount of a cryptocurrency at a predetermined price on a specific date in the future.
For example, let's say you think Bitcoin (BTC) will be worth $70,000 in three months. You could buy a Bitcoin futures contract that expires in three months at a current price of $65,000. If your prediction is correct, you can sell the contract for a profit before the expiration date.
Perpetual contracts are similar to futures contracts, but they don’t have an expiration date. They use a mechanism called “funding rates” to keep the contract price close to the spot price of the cryptocurrency. We'll discuss how contract months relate to these later.
What are Contract Months?
Contract months refer to the months in which futures contracts expire. Each contract has a designated expiry date. Exchanges categorize contracts by these expiry months – typically March, June, September, and December.
So, a "BTCUSD Quarterly Futures Contract" expiring in June is referred to as the "June contract."
Here’s a simple breakdown:
- **March Contract:** Expires in March
- **June Contract:** Expires in June
- **September Contract:** Expires in September
- **December Contract:** Expires in December
These are the most common, but some exchanges may offer more frequent contract months.
Why Do Contract Months Matter?
Contract months impact your trading in several ways:
- **Price Discovery:** The price of a contract reflects the market’s expectation of the cryptocurrency’s price at expiry.
- **Trading Volume:** Contracts closer to expiry usually have higher trading volume as traders actively manage their positions.
- **Roll Over:** As a contract approaches its expiry date, traders need to “roll over” their positions to the next contract month to avoid taking physical delivery of the cryptocurrency (which isn’t usually desired). This can affect price.
- **Funding Rates (for Perpetual Contracts):** While perpetual contracts don’t expire, funding rates are often influenced by the prices of quarterly futures contracts, impacting your holding costs.
Contract Months and Perpetual Contracts
Even though perpetual contracts don't have expiry dates, contract months are still relevant. The price of the nearest quarterly futures contract strongly influences the funding rate of the perpetual contract.
- **Positive Funding Rate:** If the futures contract price is higher than the perpetual contract price, long positions pay funding to short positions.
- **Negative Funding Rate:** If the futures contract price is lower than the perpetual contract price, short positions pay funding to long positions.
This mechanism keeps the perpetual contract price anchored to the underlying spot price.
Rolling Over Your Position
“Rolling over” means closing your current contract and opening a new one in a further-out contract month. This is essential to avoid expiry.
Here’s how it works:
1. **Close Your Existing Contract:** Sell your current contract (e.g., the June contract). 2. **Open a New Contract:** Buy a contract with a later expiry date (e.g., the September contract).
Rolling over often involves a small cost or benefit depending on the difference in price between the contracts (known as “basis”).
Understanding Basis
The “basis” is the difference between the futures price and the spot price.
- **Contango:** When futures prices are higher than the spot price (basis is positive). This usually happens when there's an expectation of future price increases.
- **Backwardation:** When futures prices are lower than the spot price (basis is negative). This usually happens when there's an expectation of future price decreases.
Basis impacts the cost of rolling over positions.
Contract Month Comparison
Here’s a comparison of trading near vs. far contract months:
| Contract Month | Trading Volume | Price Discovery | Roll Over Complexity | |||||
|---|---|---|---|---|---|---|---|---|
| Near-Term (e.g., June) | High | More accurate reflection of short-term expectations | High – Requires frequent rolling | Far-Term (e.g., December) | Lower | Reflects long-term expectations | Low – Less frequent rolling |
Practical Steps for Trading Contract Months
1. **Choose an Exchange:** Select a reputable exchange that offers futures and perpetual contracts. Consider options like Register now or Start trading. 2. **Understand the Contract Specifications:** Before trading, carefully review the contract specifications for each month, including expiry date, tick size, and minimum trading volume. 3. **Monitor the Basis:** Keep an eye on the basis to understand the cost of rolling over positions. 4. **Plan Your Roll Over Strategy:** Decide when and how you will roll over your positions to avoid expiry. 5. **Utilize Technical Analysis:** Employ technical analysis tools to predict price movements and optimize your trading strategy. 6. **Analyze Trading Volume:** Use trading volume analysis to confirm trends and identify potential breakout points.
Resources for Further Learning
- Cryptocurrency Futures Trading
- Perpetual Contracts
- Funding Rates
- Risk Management in Crypto
- Technical Analysis Basics
- Trading Volume Indicators
- Order Types
- Margin Trading
- Spot Trading
- Derivatives Trading
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- Binance Futures(https://www.binance.com/en/futures/ref/Z56RU0SP)
Conclusion
Understanding contract months is crucial for successful futures and perpetual contract trading. By grasping the concepts of expiry, rolling over, and basis, you can make informed trading decisions and manage your risk effectively. Remember to start small, practice consistently, and continue learning!
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