What’s the active futures contract?

In futures trading, the active contract usually is the contract with the most trading activity for a specific asset at any given time. This contract, often referred to as the “front-month” contract, is usually the one closest to its expiration date. Traders focus on the active contract because it usually has the highest trading volume, making it easier to enter and exit positions quickly. More trading activity means better liquidity, which allows for smoother transactions and smaller price differences between buying and selling (known as the bid-ask spread).

The active contract is generally preferred by traders because of its liquidity and efficiency. When there's more trading volume, it’s easier to find buyers and sellers, and transactions are usually completed faster. On the other hand, contracts that are further away from expiration, called back-month contracts, often have lower volume and can be harder to trade. These contracts might be useful for long-term strategies but are typically less attractive for active traders due to their lower liquidity.

Although most traders focus on the active contract, understanding other expirations can offer valuable insights. Back-month contracts can provide clues about future expectations for the asset, like changes in supply, demand, or shifts in market sentiment. Analyzing these longer-term contracts can help traders make more informed decisions, even if they prefer to trade in the more liquid front-month contract. If you're unsure which contract is currently active, this information is easy to find on most trading platforms, including Robinhood.

Example

Stock index futures, like the E-Mini S&P 500 Index (/ES), have quarterly expirations (March - H, June - M, September - U, and December - Z), but only one will be the active contract. The active contract is usually the one with the closest expiration date, which is where most of the trading happens. For example, if it’s October, the December contract might be the active one because it’s the next in line to expire, and most traders are focused on managing their positions before expiration. This contract generally will have the highest trading volume and liquidity, making it easier for you to buy or sell quickly. While you could trade a contract expiring further in the future, it may have less activity and might be harder to enter or exit a position smoothly.

Most traders, especially those who are new to futures, choose to trade the active contract because it often has the highest volume and liquidity. This makes it easier to enter and exit positions quickly and at a fair price, with tighter bid-ask spreads. Trading a different, less active contract with a later expiration (known as a back-month contract) can be more difficult because there are fewer buyers and sellers, leading to wider spreads. However, trading a back-month contract might make sense if you have a specific time horizon in mind. In general, however, sticking with the active contract is the simplest and most efficient choice for most traders.

Choosing an expiration in futures is somewhat similar to choosing an expiration in options, but there are key differences. In both cases, you’re selecting a date by which the contract will settle. However, with options, you're often choosing an expiration based on your strategy for time decay (theta) or volatility, as well as your expectation for the stock’s movement before that date. In futures, expiration is more about liquidity and market activity—traders usually stick to the active (front-month) contract for ease of trading and better pricing.

The active contract in futures trading typically switches as the current front-month contract approaches its expiration. This shift usually happens in the days or weeks leading up to the expiration date, when traders begin rolling their positions into the next contract with a later expiration. The transition to the new active contract is often driven by declining liquidity in the expiring contract and increasing volume in the next one. The exact timing of the switch can vary by product, but it usually occurs in the weeks or days before the current contract expires, though traders may start rolling even earlier in some markets.

As the last day to trade a futures contract approaches, traders looking to open new positions shift their focus to the next active contract, while those wanting to maintain existing positions will begin rolling them into the next contract month.

In futures, rolling refers to the process of closing out a position in a contract that is nearing expiration and opening a new position in the next month’s contract to maintain market exposure. This allows traders to avoid expiration while keeping their position intact. However, they’ll also pay commissions and fees to close the position and also to open the other.

For example, if a trader is long a March Micro S&P 500 Index futures (/MES) contract that’s nearing expiration, they could roll their position to the June contract. This is done by selling to close the March contract and buying to open the June contract. While the margin requirement usually remains the same, the price may differ between the two expirations, which is normal in futures trading.

Being aware of which contract is currently the active contract is crucial, as liquidity gradually shifts to the new one. Failing to roll in time can result in undesirable outcomes, such as having your broker close the position automatically in the case of physically-settled futures and losing the market exposure you intended to maintain.

The active contract in futures trading is usually the one with the highest volume and liquidity, usually closest to expiration, making it the best option for most traders due to ease of entry and exit. While most traders stick to the active contract, understanding the back-month prices can offer insights into future market expectations. Traders who need to maintain positions as contracts near expiration will often "roll" them into the next month’s contract to avoid expiration and maintain market exposure.