Options & derivatives
Contango
When futures prices further out are higher than nearer ones, so rolling a position costs money.
How it works
Contango is normal in markets with storage costs. A fund holding futures must repeatedly sell the expiring contract and buy a more expensive one, losing a little each time.
Over long periods this roll cost can dominate returns entirely.
Where it misleads people
This is why commodity and volatility exchange-traded products so often decay. The product tracks futures, not the spot price everyone is watching.
Worked example
An oil fund in persistent contango can lose money over a year in which the spot oil price rose, purely from rolling.
Related terms
- Futures contractA standardised, exchange-traded agreement to buy or sell something at a set price on a future date.
- BackwardationWhen futures prices further out are lower than nearer ones, so rolling earns money.
- CommodityA raw physical good — oil, gold, wheat, copper — traded in standardised units.
- VIXAn index of the volatility the market expects in the S&P 500 over the next thirty days.
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Educational reference only. Nothing here is investment advice or a recommendation to buy or sell anything, and tax treatment depends on your own circumstances and the country you are in.