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Roll yield

The gain or loss a futures holder earns purely from rolling into a differently priced contract month, separate from any move in spot price.

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.

If the curve is in backwardation, a long holder sells an expensive expiring contract and buys a cheaper deferred one, banking positive roll yield. In contango the trade runs the other way and roll yield is negative — a steady bleed even if spot never moves.

Roll yield is the main reason long-only commodity funds and volatility products diverge so badly from the spot index they advertise.

Example: front crude $80, next month $81.20. Rolling long costs 1.5% per month, about 18% annualised if the curve shape persists. A flat spot price for a year still produces a large loss.

Related: contango, backwardation, roll, forward-curve, cost-of-carry

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