When does contango occur?
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: Sebastian Beahan
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Contango is when the futures price is above the expected future spot price. 3 Because the futures price must converge on the expected future spot price, contango implies futures prices are falling over time as new information brings them into line with the expected future spot price.
How does contango happen?
Contango is a situation where the futures price of a commodity is higher than the spot price. Contango usually occurs when an asset price is expected to rise over time. That results in an upward sloping forward curve.
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.
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 know if its backwardation or 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.
What are 'contango' and 'backwardation'? - MoneyWeek Investment Tutorials
Is contango good or bad?
As a rule of thumb, if you're investing in commodities ETFs, backwardation is good and contango is bad. Investors can never be certain which way the market will go. Some futures, like pigs, wheat and natural gas are almost always in contango. Others, such as soybeans and gasoline, are often in backwardation.
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.
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.
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.
Why is there contango in Bitcoin futures?
This is somewhat unusual because in “normal” futures markets it's the reverse situation—referred to as “contango.” Contango exists in most markets because it's expected that over time prices increase (ostensibly due to inflation and other market factors).
Why there is difference between spot price and future price?
The main difference between spot and futures prices is that spot prices are for immediate buying and selling, while futures contracts delay payment and delivery to predetermined future dates. ... In either situation, the futures price is expected to eventually converge with the current market price.
Is VIX a contango?
The $VIX futures term structure in contango, the $VVIX Index falls over 8 points to 111 handle & @RussellRhoads breaks down Feb $VIX options trading as the Feb $VIX future remains elevated above the front month.
Why does contango have low spot prices?
Because the normal course of a futures contract in a market in contango is to decline in price, a fund composed of such contracts buys the contracts at the high price (going forward) and closes them out later at the usually lower spot price.
What is contango spread?
A contango is a situation where the futures price of a commodity is higher than the spot price. Another way for traders to profit off a contango market is to place a spread trade.
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.
Is oil backwardation bullish?
According to Gamma Point Managing Partner Rahul Rai, the backwardation is hardly a bullish sign. To wit, the condition might represent a bearish sentiment among institutions. “CME is a venue for them to get short BTC exposure at scale,” Rai said.
How do you determine backwardation?
One way to identify futures that are experiencing backwardation is to look at the spread between near-month contracts and contracts that are further out. If a futures contract trades below the spot price, it will increase because the price must eventually converge with the spot price upon contract expiration.
How much is a Bitcoin futures contract?
The price of a single bitcoin, when the futures contract was purchased, is $5,000 each, meaning the total price for both futures contracts is $50,000. The margin requirements for bitcoin futures trading at CME is 50%, meaning that the investor has to deposit $25,000 as margin.
Is the oil market usually in contango or backwardation?
Looking later in the year, Brent futures remained in deep backwardation, with prices for immediate delivery higher than those for dispatch in November. Backwardation, in contrast to contango, signals tight conditions, discouraging storage.
What is the spot price of a future?
The spot price is the current market price at which an asset is bought or sold for immediate payment and delivery. It is differentiated from the forward price or the futures price, which are prices at which an asset can be bought or sold for delivery in the future.
Is copper a contango?
The cash-to-three-month copper spread was back in contango on the London Metal Exchange on Monday May 13 after falling into a backwardation at the end of last week on a spate of buying on the cash contract.
Is backwardation bullish for gold?
Hence, investors can watch the backwardation in the gold market, as it may signal the imbalance between supply and demand for the yellow metal. ... In the environment of low interest rates, investors shouldn't consider it as a bullish indicator of supply shortages.
What are gold futures?
Gold futures are standardized, exchange-traded contracts in which the contract buyer agrees to take delivery, from the seller, a specific quantity of gold at a predetermined price on a future delivery date.
Is backwardation or contango more common?
What is backwardation? Backwardation is the market condition in which the price of a futures contract is currently trading lower than the spot price of the underlying. It is the opposite to contango and much less common because backwardation tends to affect markets with seasonal changes in supply and demand.