Contango vs Backwardation
Also known as: contango, backwardation, futures curve shape, carry structure, roll yield
What is it?
Contango and backwardation describe the shape of a futures curve: in contango the later contract months trade above the front month, and in backwardation they trade below it. Put numbers on it. If front-month crude is $78.40 and the contract three months out is $80.10, the curve is in contango by $1.70.
Same market, opposite running cost
Contango
- Later contracts trade above the front month: $78.40 now, $80.10 three months out.
- Reflects the cost of storing, insuring and financing the asset until that date.
- Rolling a long gives up about $1.70 a contract per quarter, roughly 57c a month.
- Typical when inventories are comfortable and nobody is in a rush to own the asset.
Rolling costs you money every quarter.
Backwardation
- Later contracts trade below the front month: $78.40 now, $76.90 three months out.
- Reflects scarcity - buyers pay a premium to hold the asset today rather than later.
- Rolling a long picks up about $1.50 a contract per quarter instead of losing it.
- Typical when inventories are low or supply has been disrupted.
Rolling pays you money every quarter.
Every time you roll a long position forward you sell the cheaper near contract and buy the dearer far one, so that $1.70 is handed over across the quarter - roughly 57 cents a month - before the market has moved at all. Flip the numbers, with the far contract at $76.90, and the same rolls pay you $1.50 instead. The shape is not arbitrary.
Contango usually reflects the real cost of carrying the asset to the later date: storage, insurance and financing. Backwardation usually reflects scarcity - buyers are paying a premium to have the asset now rather than in three months. Either way, the shape only bills traders who hold a position past an expiry, which makes it a running cost of duration rather than of direction.
Why it matters: The curve's shape decides whether holding a position past expiry quietly costs you money at every roll or quietly pays you, before price has moved at all.
Roll yield = (front-month price - next-month price) / front-month price
It sets the running cost of any position held past an expiry, which compounds over months even when the spot price goes nowhere.
Real-world example
With crude at $78.40 front month and $80.10 three months out, a long position rolled forward gives up about $1.70 a contract over that quarter before the market moves at all.
How SignalBots handles it
SignalBots signals carry a defined exit rather than an open-ended hold, so a curve-shape cost does not accumulate quietly behind a trade you were told to keep. See /risk-warning.
Pro tip
Compare the front two contract months before entering any multi-week position - that one spread tells you which way the curve will bill you at the next roll.
Common pitfalls
Assuming a commodity ETF tracks the spot price. In steep contango it can lose value over a year while spot is flat, purely from rolling.
Frequently asked questions
Which way round is contango again?
Contango is the upward-sloping curve: the further out the contract, the higher its price. Backwardation is the downward-sloping one. A quick check is to compare the front month against the contract three months out - if the far one is dearer, you are in contango.
Does contango mean the market expects higher prices?
Not reliably. Most of the slope in a contango curve is the cost of storing and financing the asset until that date, not a forecast. Treating the far contract's price as a prediction of spot is one of the most common misreadings of the curve.
Who actually pays the roll cost?
Anyone who holds a position past an expiry and reopens it in the next month, including commodity ETFs and index products that roll on a published schedule. A trade that opens and closes inside one contract month never touches it.
Can a curve be in contango and backwardation at once?
Yes. A curve can be backwardated at the front, where supply is tight, and in contango further out, where normal carry costs dominate. That is why the roll cost depends on the two specific months you are rolling between.
Does this affect forex or crypto trading?
The same mechanic appears as the swap rate in forex and the funding rate on crypto perpetuals. The label changes but the idea does not - holding across time has a price, and it can run either way.
Trading involves substantial risk of loss. Historical and backtested results do not guarantee future performance. Read the full risk warning.
