What is the Main Contract?
The main contract in futures markets is the most liquid and active contract available. Within each futures category, there are usually multiple contracts representing different expiry months. Among these, the main contract refers to the one with the largest trading volume and highest liquidity during a specific period.
The trading volume of the main contract is typically larger than that of other contracts, and market participants prefer to trade in the main contract. This is because the main contract has higher liquidity, smaller bid-ask spreads, and faster execution, making it easier to enter and exit the market and conduct large transactions. There are several advantages to trading in the main contract.
- High liquidity: The high liquidity of the main contract means there are more buyers and sellers in the market, making transactions easier and prices more stable.
- More breakout points: The main contract is more susceptible to market fluctuations, with larger price volatility offering more trading opportunities.
- Smaller bid-ask spreads: Main contracts usually have smaller bid-ask spreads due to the intensified competition among the numerous buyers and sellers participating in the market.
The identification method for the main contract may vary according to the rules of the exchange. Some exchanges might use numerical labels for contracts of different expiry months, for instance, the main contract could be labeled as "Main Contract 1" or "M1," while the secondary main contract might be labeled as "Main Contract 2" or "M2." Other exchanges might use letters or other methods for identification.
It is important to note that as time progresses, the expiry months will gradually shift, and new contracts will replace old ones to become the new main contracts. Therefore, traders need to pay attention to the exchange's announcements and rules, as well as the liquidity and activity levels in the market when selecting the main contract.
Differences Between the Main Contract and Other Contracts
There are several differences between the main contract and other contracts, including the following aspects.
- Liquidity and activity: The main contract is usually the most liquid and active contract in the futures market. It attracts more traders and investors, with larger trading volumes, smaller bid-ask spreads, and quicker executions. In contrast, other contracts may have smaller trading volumes and lower liquidity, resulting in larger bid-ask spreads and potentially more difficult trading.
- Expiry months: In the same futures category, in addition to the main contract, there are usually other contracts representing different expiry months. The main contract has the largest trading volume and highest liquidity during a certain period, while other contracts represent contracts of different expiry months, each with its expiration date and delivery rules.
- Price volatility: The main contract tends to be more sensitive and active in price movements because more traders participate in it. As the market changes, the price volatility of the main contract might be larger, offering more trading opportunities. Other contracts, due to their lower liquidity, might have smaller price fluctuations.
- Trading costs: Due to the higher liquidity and smaller bid-ask spreads, trading costs for the main contract are generally lower. In contrast, other contracts, with lower liquidity and larger bid-ask spreads, might have higher trading costs.
- Delivery rules: Different expiry month contracts may have different delivery rules. There might be differences in delivery rules between the main contract and other contracts, including delivery dates and methods. Traders need to understand and comply with the respective delivery rules when choosing contracts.
Additionally, the main contract is determined based on market liquidity and trading activity, and with time, expiry months will gradually shift. Investors need to pay attention to exchange announcements and rules and the liquidity and activity levels in the market, and make choices based on their trading strategy and needs.
How to Invest Using the Main Contract and Other Contracts?
Investing using the main contract and other contracts can be tailored to individual investment goals and strategies. Below are some common investment methods.
- Main contract trading: The main contract, with its higher liquidity and activity, is suitable for short-term trading and investors who frequently adjust positions. By tracking the price dynamics of the main contract, participants can leverage price volatility for buy and sell transactions to find short-term profit opportunities.
- Cross-contract arbitrage: Cross-contract arbitrage involves trading the price differences between the main contract and other contracts. Investors can monitor the prices of contracts with different expiry months, and when a price discrepancy exists, profit by buying the lower-priced contract while selling the higher-priced one. This strategy usually requires in-depth research on contract expiry months, delivery rules, and accurate market trend prediction.
- Portfolio diversification: Holding both the main contract and other contracts allows investors to diversify their portfolio. The main contract provides liquidity and activity, while other contracts cover different expiry months and risk exposures, thus reducing overall portfolio risk.
- Switching upon delivery: As contract expiry months shift, investors can switch between different contracts based on market conditions and personal needs. When a contract is nearing expiration, investors may choose to close positions and move to the next expiry month's main contract or another contract to extend the investment duration or adapt to new market conditions.
- Long-term investment: Apart from short-term trading, investors can also use the main contract and other contracts for long-term investment. By choosing contracts that align with their long-term investment outlook, investors can participate in the market's long-term trends and achieve long-term investment returns.
When investing in the main contract and other contracts, it's crucial to conduct thorough market analysis and risk management. Understanding the characteristics of the contracts, market trends, exchange rules, and relevant fundamental and technical indicators are important factors in investment decisions. Additionally, investors should select suitable investment strategies based on their risk tolerance, investment objectives, and time horizon.
