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I recently started trading futures and I have noticed that many-a-times the farthest month's future contract is priced at an insanely cheap rate. Thus, anyone can buy it and be rich.

For example

Consider a company named "alexa".

Spot price in the market: 1000

Future contract price of the current month: 1005

Future contract price of the middle month: 1015

Future contract price of the farthest month: 30

The pricing of the farthest-month looks odd, shouldn't it be somewhere around 1025?

I must also mention that the farthest month's future contract has a very low volume; around 5-10 orders in total per day, but yes, if you wish you can buy one for 30; albeit very low quantity.

I am asking this question because if it is priced 30, then why don't anyone buy it and then wait a month to get exponential returns; after all, the future's pricing will mimic spot's price as the expiry date approaches.

So, is there something 'shady' with the farthest month's contract pricing or am I missing some key concept?

Also, you must know that I trade in the Indian market, so please make sure your answer implies in this market.

Thank you for your time!

UPDATE: Please check this image for reference.

Please check this image for reference

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if you wish you can buy one for 30

I doubt it. When looking at long-dated prices (really any price for that matter), you need to be sure to look at the bid and the ask. Long-dated futures are often very illiquid, so there might be a huge difference between what you cay buy them for (the ask) and what you can sell them for (the bid). The quoted price is sometimes the midpoint of the two, so that means you won't necessarily be able to buy futures at that price. Even worse is when the quote is the last traded price, which might have been days ago when the near-term price was much different.

That said, a $30 futures quote with a $1,000 spot quote is either a data error or someone threw out a $30 limit buy order with the hope that someone takes it by mistake or it generates some interest in the instrument just by the sheer absurdity of the ask.

  • Thank you for the answer. I agree that far-month future contracts are indeed hard to liquidate, but won't they be very liquid once that far-month becomes the currency month? Like, buying July's future contract in May at 30$ which has a spot price of $1000. By the time it is July, the July's contract must be liquid and probably around $1000. Thus I stand to make exponential profits, am I right? Should I buy it? – Anoneemus May 9 '17 at 2:59
  • You won't be able to buy it for $30. Anybody selling it to you for $30 would have to be out of their mind. You can try to place a limit order, I'll bet you that it won't be filled. This price is bogus. Like the answer suggests, look at bid ask to see what prices the counterparties are actually willing to trade at. – SMeznaric May 9 '17 at 11:36

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