Key Takeaways
- Contango is a situation where the futures price of a commodity is higher than the spot price.
- In all futures market scenarios, the futures prices will usually converge toward the spot prices as the contracts approach expiration.
- Advanced traders can use arbitrage and other strategies to profit from contango.
What is contango in futures?
Contango is when the futures price is above the expected future spot price. A contango market is often confused with a normal futures curve. Normal backwardation is when the futures price is below the expected future spot price.
What is the meaning of contango?
Loading the player... Contango is a situation where the futures price of a commodity is above the expected spot price. Contango refers to a situation where the future spot price is below the current price, and people are willing to pay more for a commodity at some point in the future than the actual expected price of the commodity.
How do you profit from contango in commodities?
There is also another approach to profiting from contango. Futures prices above the spot price can be a signal of higher prices in the future, particularly when inflation is high. Speculators may buy more of the commodity experiencing contango in an attempt to profit from higher expected prices in the future.
What is contango and backwardation?
What is contango? The terms contango and backwardation both refer to current conditions in a futures market for a given commodity. A futures market is said to be in contango if the price of a futures contract that expires sooner is less than the price for a later-expiring futures contract.
Is contango bullish or bearish?
bullishContango refers to a situation where the futures price of an underlying commodity is higher than its current spot price. Contango is considered a bullish sign because the market expects that the price of the underlying commodity will rise in the future and as such, participants are willing to pay a premium for it now.
Which is better contango or backwardation?
During Contango as the future price is higher so the profit is maximum when you sell it in the future. During Backwardation as the future price is going to decrease further in the future, purchasing it later for an investor would be a greater profit.
Why is it called contango?
The term originated in 19th century England and is believed to be a corruption of "continuation", "continue" or "contingent". In the past on the London Stock Exchange, contango was a fee paid by a buyer to a seller when the buyer wished to defer settlement of the trade they had agreed.
Is contango or backwardation bullish?
Backwardation is theoretically a bullish sign for oil, because it means traders no longer have an incentive to store oil and sell it at a later date. Instead, it's best for them to sell oil now because prices could be lower in the future.
How do you profit from contango?
Placing a Spread Trade Another way for traders to profit off a contango market is to place a spread trade. Going back to the example, say a trader believes that the spot price of oil will go even lower versus the future month's contract. A trader would short the spot month contract and buy the further out month.
Why is Bitcoin in contango?
Futures in contango indicates that the supply of Bitcoin is plentiful because there is no cap on futures open interest, says Steve Sosnick, chief strategist at Interactive Brokers.
Why is gold always in contango?
Generally speaking, contango is a normal situation for durable and easily storable commodities which have a cost of carry, such as gold. This is due to the carry costs - higher futures price is a way of paying for these costs. Indeed, gold spends most of the time in contango.
Why is oil in contango?
A contango market occurs when prompt crude oil prices fall below those further out in the future. There are futures contracts for each month going out many years. These prices reflect the market's current as well as future expectations of oil prices.
Is contango normal?
Key Takeaways. Contango is when the futures price is above the expected future spot price. A contango market is often confused with a normal futures curve. Normal backwardation is when the futures price is below the expected future spot price.
How do you know if a market is in contango?
Contango and backwardation are terms used to define the structure of the forward curve. When a market is in contango, the forward price of a futures contract is higher than the spot price. Conversely, when a market is in backwardation, the forward price of the futures contract is lower than the spot price.
Is the oil market currently in contango or backwardation?
backwardationThe brent curve has broadly remained in backwardation since the beginning of 2021 as OPEC+ began to curtail production to balance the market once the COVID pandemic began. The United States strategic petroleum reserve currently reads 577.5 million barrels which is almost at a ten-year low.
Is the oil market currently in backwardation?
Right now, Brent crude, the international benchmark oil price, is trading at its most severe backwardation since futures prices have been tracked, UBS strategists wrote on Thursday. In fact, they call it “super backwardation.”
What is contango in commodities?
To understand what contango is, it's important to first understand how futures work and , specifically, commodity futures, which is where the phenomenon known as contango normally occurs. When we talk about raw materials or commodities we are referring to basic components of more complex goods or services, for example, food bases such as sugar, ...
What is contango in futures?
Contango is the phenomenon that occurs when the price of futures contracts is higher than that of the underlying asset (the spot price or spot price). In this case, the price curve of the successive maturities of the futures contracts is ascending, although as the maturity dates approach, the price will tend to converge with the spot price. ...
Why is contango common in gold?
A common case of contango tends to occur with gold, for two reasons: in times of crisis, it becomes a safe haven, pushing futures prices higher.
Why does contango occur?
A common case of contango tends to occur with gold, for two reasons: in times of crisis, it becomes a safe haven, pushing futures prices higher. Secondly, due to the storage costs of this metal, which are very high.
What is the opposite of contango?
The opposite effect to contango is called backwardation. In this case, the price of futures contracts is lower than the spot asset price or its spot price. Unlike in contango, the graph in this case is downward, that is, it is falling from one maturity to the next and so on. In this case, the demand for the asset is so high that the further its delivery goes in time, the cheaper it will be. The future price will also tend to converge with the spot price as expiration dates approach.
Do intraday traders have to worry about contango?
Intraday traders do not have to worry about contango or backwardation because being such a short period of time will not influence their operations. However, long-term traders should take this into account. How? We explain it below:
How did contango affect ETFs?
Prevailing contango gradually eroded the ETFs' assets by forcing the funds to pay incrementally more to roll forward expiring futures contracts month after month. Yet you can't count on any given market always being in contango.
What is contango backwards?
The terms contango and backwardation both refer to current conditions in a futures market for a given commodity. A futures market is said to be in contango if the price of a futures contract that expires sooner is less than the price for a later-expiring futures contract. If the price of the later contract is less than the one that expires sooner, ...
What Is Contango?
Futures contract investing involves a great deal of speculation and risk. The further out the expiration of the contract, the greater the risk to the investor due to the potential for price fluctuations of the commodity.
What Does Contango Tell Investors?
Contango offers numerous clues and opportunities for investors who trade in commodities. This situation alerts traders to dislocations in the market, such as higher-than-expected inflation, supply disruptions or increased demand. Investors who act quickly can also take advantage of arbitrage opportunities when contango occurs.
The Bottom Line
No, contango is not a type of dance. Futures contracts investors expect to buy or sell commodities at a fixed price on a specific date in the future. When prices are higher, this creates contango and when they are lower, that is known as normal backwardation.
Tips on Investing
When investing in derivatives, which includes futures, it’s important to fully understand the downsides as well as the upsides. That’s where a financial advisor can offer extremely valuable advice. Finding such a professional doesn’t have to be hard.
What is contango in financials?
Definition of Contango. Contango is a circumstance where the futures price of a particular commodity is higher than its current price. It happens when there is the hope of a boost in the price of the commodity and it is represented by the upward slowing forward curve. It is a common market procedure where long-term securities are marketed higher in ...
Why is contango called contango?
The term contango is called so because of the corruption during the 19th century in England. The corruption is to continue, continuation, or, contingent. The contango was used to be a fee paid by buyers when they wished to delay the settlement of trade they had agreed for. The interest rate was decided by the seller.
How does Contango work?
Contango is seemed to be very helpful for investors in making bets for the future more accurately. It also helps the market in determining whether the price of their underlying commodities will grow or shows a downfall in the future which makes them confident in determining the price of the commodity. The opposite of it is backwardation which assists the old investor willing to grow future price to the level of the spot price. It also directs the negative rolling return because the future prices are higher than the spot price.
Why do people use contango?
Contango occurs due to the people’s intention of paying a premium instead of holding up a commodity which can also cost them carry over prices. Further, there is a chance of depreciation of the commodity so they prefer contango fees to postpone the settlement day.
Is contango favorable to producers?
On the other hand, it is favorable for the producer or the commodity holders as they are getting a high rate of interest in their products which is more than expected so they have no problem in getting a postponement of payment as long as they are being paid by contango fees.
Is Contango good for the stock market?
Contango in the Stock Market. Contango proves to be very helpful in the stock market as the futures prices can be predicted with the help of it. This helps the hedgers in deciding the best price for their commodities.
What is contango?
The terms contango and backwardation both refer to current conditions in a futures market for a given commodity. A futures market is said to be in contango if the price of a futures contract that expires sooner is less than the price for a later-expiring futures contract.
Where you'll find contango
Contango has had the biggest impact on ETFs that invest in futures contracts. Products like United States Natural Gas (NYSEMKT: UNG) and United States Oil (NYSEMKT: USO) have lost most of their value over the past decade, and only part of their declines have come from weak energy prices.
Know the risks
Futures contracts are very useful in some cases, but they have risks that most stock investors don't know about. By being aware of contango and backwardation, you can identify potential long-term threats to your portfolio that others will miss, avoiding nasty and costly mistakes.
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Contango vs. Normal Backwardation: An Overview
The shape of the futures curve is important to commodity hedgers and speculators. Both care about whether commodity futures markets are contango markets or normal backwardation markets. However, these two curves are often confused for one another.
Normal Backwardation
A normal backwardation market—sometimes called simply backwardation—is confused with an inverted futures curve.
Special Considerations
To better understand the difference between the two, start with a static picture of a futures curve. A static picture of the futures curve plots futures prices (y-axis) against contract maturities (i.e., terms to maturity). This is analogous to a plot of the term structure of interest rates.
Key Differences
A futures market is normal if futures prices are higher at longer maturities and inverted if futures prices are lower at distant maturities.
The Bottom Line
Knowing the difference between contango and backwardation will help you avoid losses in the futures market .
Understanding Contango
- Futures contract supply and demand affect the futures price at each available expiration. In contango, investors are willing to pay more for a commodity in the future. The premium above the current spot price for a particular expiration date is usually associated with the cost of carry. Co…
Contango vs. Backwardation
- Contango, sometimes referred to as forwardation, is the opposite of backwardation. In the futures markets, the forward curve can be in contango or backwardation. A market is "in backwardation" when the futures price is below the spot price for a particular asset. In general, backwardation can be the result of current supply and demand factors. It may be signaling that investors are expect…
Advantages and Disadvantages of Contango
- Advantages of Contago
One way to benefit from contango is through arbitrage strategies. For example, an arbitrageur might buy a commodity at the spot price and then immediately sell it at a higher futures price. As futures contracts near expiration, this type of arbitrage increases. The spot and futures price act… - Disadvantages of Contango
The most significant disadvantage of contango comes from automatically rolling forward contracts, which is a common strategy for commodity ETFs. Investors who buy commodity contracts when markets are in contango tend to lose some money when the futures contracts e…
What Is Contango?
Contango vs Backwardation
- The opposite effect to contango is called backwardation. In this case, the price of futures contracts is lower than the spot asset price or its spot price. Unlike in contango, the graph in this case is downward, that is, it is falling from one maturity to the next and so on. In this case, the demand for the asset is so high that the further its delivery goes in time, the cheaper it will be. T…
Contango - Long Or Short Trading?
- Intraday traders do not have to worry about contango or backwardation because being such a short period of time will not influence their operations. However, long-term traders should take this into account. How? We explain it below: 1. If we are long in futures when a contango situation occurs, we may lose approximately the difference between the spot price and the future price. C…
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