What does contango mean?

Last Update: April 20, 2022

This is a question our experts keep getting from time to time. Now, we have got the complete detailed explanation and answer for everyone, who is interested!

Asked by: Bertha Pagac
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Contango is a situation where the futures price of a commodity is higher than the expected spot price of the contract at maturity.

Is contango bullish or bearish?

Contango is thus a bullish indicator, showing that the market expects the price of the futures contract to increase steadily into the future.

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.

What is contango in ETF?

Contango translates into roll costs to an investor (or an ETF) having to move from one contract to the next. The opposite of contango is backwardation, when the expiring futures contract is trading at a premium to the next contract. Contango and backwardation impact commodity futures and futures-based ETF returns.

What is contango in oil mean?

A contango market occurs when prompt crude oil prices fall below those further out in the future. ... Contango is normal for a non-perishable commodity, like crude oil and products, which have a cost of carry. Such costs include storage fees and interest forgone on money that is tied up in inventory.

What are 'contango' and 'backwardation'? - MoneyWeek Investment Tutorials

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Is contango good or bad?

Contango is a problem because if you keep rolling your futures contracts in a contango market, it will whittle away any potential returns. Worse, a long contango market can undermine all the gains made from rising spot prices.

What causes contango?

Contango can be caused by several factors, including inflation expectations, expected future supply disruptions, and the carrying costs of the commodity in question. Some investors will seek to profit from contango by exploiting arbitrage opportunities between the futures and spot prices.

Why is contango bad for ETFs?

The reason that contango is bad for certain ETFs is that if you're constantly paying higher prices every single month to replace your expiring contract with the next month's futures contract, you'll slowly but surely lose money in relation to the movement in the spot price of the commodity.

Is Uvxy a contango?

Leveraged ETFs on the VIX, crude oil, gold and even the S&P 500 all fall under contango pricing. ... This is why leveraged ETFs like the UVXY tend to lose 8 to 13% monthly during low volatility periods. Long-term investors should never hold these ETFs in a portfolio as the time decay erodes value.

How does contango affect ETF?

[VIDEO] How Contango Affects Commodity ETFs

When that additional cost to move from one month's futures contract to the next month's expiration is much larger than normal traders say that the market is in “contango.” This increases costs and can stunt your expected returns significantly.

What is normal contango?

The relationship between the futures price of an asset being greater than the expected spot price of the asset on the delivery date of the contract.

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 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.

How do you know if a market is in contango?

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 trade contango?

One way to trade contango is to go short or sell at spot price and then go long or buy a further out contract. This can lock in a higher sell price and a lower buy price.

What affects the price of a future?

Many factors affect the price of futures, such as interest rates, storage costs, and dividend income. The futures price of a non-dividend-paying and non-storable asset is the function of the risk-free rate, spot price, and time to maturity.

Does UVXY go to zero?

The ProShares Ultra VIX Short-Term Futures ETF, UVXY -3.11% which carries the ticker symbol UVXY, might be the worst investment of them all because it isn't really meant to be one. “These products are expected to go to zero,” said Scott Nations, an expert on options and volatility and president of Nations Indexes.

Does UVXY have decay?

UVXY is an ETF that allows investors to be exposed to short-term volatility. ... Due to the roll and contango effects in futures, over time the price of UVXY will decay. This means it is ill-suited to a long-term buy and hold strategy and is instead suited to very short-term bets on price volatility.

Should I buy UVXY?

UVXY Is a Good Buy as Earnings and WSB Drive Volatility. The ProShares Ultra VIX Short-Term Futures ETF (UVXY) gained 31.5 percent on Jan. 28 and is up 27 percent YTD. ... Being a passive ETF, UVXY captures the long-term price movement of VIX after accounting for tracking errors.

What causes contango and backwardation?

The opposite of backwardation is contango, where the futures contract price is higher than the expected price at some future expiration. ... The primary cause of backwardation in the commodities' futures market is a shortage of the commodity in the spot market. Manipulation of supply is common in the crude oil market.

How do you profit from backwardation?

In order to profit from backwardation, traders would need to buy a futures contract on gold that trades below the expected spot price and make a profit as the futures price converges with the spot price over time.

What is the difference between contango and backwardation?

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.

What is the difference between spot and future price?

The spot price of a commodity is the current cash cost of it for immediate purchase and delivery. The futures price locks in the cost of the commodity that will be delivered at some point other than the present—usually, some months hence.

Why is Bitcoin in contango?

The bitcoin carry trade unwinds

Contango, a term used to describe the bullish arbitrage, occurs when the bitcoin futures price is higher than the spot price. ... The one-month bitcoin futures contract has already moved into backwardation, which means the futures price is lower than the spot price.

Is oil normally in contango or backwardation?

' That's a Positive Sign. Oil prices have been trading in a pattern known as contango this year, where spot prices and near-term futures are worth less than futures expiring several months from now.