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Contango

A futures curve where later contract months are priced higher than nearer ones.

Contango and backwardationTwo futures curves against contract expiry: one rising above spot, one falling below it.The same commodity, priced for delivery at different dates.78.0076.0074.0072.0070.00Futures pricespot+1m+2m+3m+4m+5m+6mMonths until the contract expiresspot price74.00CONTANGOlater contracts cost more than spotBACKWARDATIONlater contracts cost less than spot
Contango and backwardation. A futures curve shows what buyers will pay for delivery in one month, two months and so on. When later contracts cost more than the spot price the curve is in contango; when they cost less it is in backwardation.

Contango is normal for products with storage and financing costs, such as gold and index futures. For a long holder who rolls each month, contango is a steady drag: you sell the cheaper front month and buy the pricier next month.

This roll cost is why long-only commodity and volatility ETFs can lose money over time even when the spot price is flat.

Example: front-month crude at $80, next month at $81. A trader holding long through the roll pays about 1.25% per month in roll cost if the curve stays the same.

Related: backwardation, roll, front-month, etf

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