Contango can be caused by a variety of factors, including inflation expectations, anticipated future supply disruptions, and the carrying cost of related commodities. Some investors will profit from contango by taking advantage of arbitrage opportunities between futures and spot prices.

What causes contango and backwardation?

The opposite of backwardation is the price of a futures contract, where the price of a futures contract is higher than the expected price on a future expiry date. … the main reason for backwardation in commodity futures markets is Commodity shortages on the spot market. Supply manipulation is common in the crude oil market.

Why Futures Spreads?

In jargon, contango is an upward sloping futures curve. Contango is a problem because If you continue to roll your futures contracts in a contango market, it will reduce any potential returns. To make matters worse, a long-term contango market could destroy all the gains from higher spot prices.

Why is futures premium normal?

The positive spread is Normal for non-perishable goods with shipping costs. These costs include storage fees and interest forgone due to the tied currency (or time value of money, etc.) and, if possible, less income from renting out commodities (eg gold).

Why are futures premiums bullish?

Contango Spreads on Commodity Futures

Because futures contracts are available in different months of the year, Contract price changes month by month… Thus, Contango is a bullish indicator that the market expects the price of futures contracts to rise steadily in the future.

What are « contango » and « backwardation »? – MoneyWeek Investing Tutorial

27 related questions found

How do you profit from futures premiums?

One way to benefit from contango is through arbitrage strategiesFor example, an arbitrageur might buy a commodity at the spot price and then immediately sell it at a higher futures price. This spread increases as futures contracts approach expiration.

Is there still oil in futures premium?

it’s still in contango, the spread is minus $9 per ton. Despite the current weakness, the spread remains well above the negative $92 a tonne level in April 2020, when many countries entered the first round of lockdowns and oil sellers struggled to find buyers when storage tanks were full.

Why is gold always in contango?

In general, contango is the norm for durable and easy-to-store commodities that have carrying cost, such as gold. This is due to carrying costs – higher futures prices are a way to cover these costs. In fact, gold is in contango most of the time.

Which is better contango or backwardation?

When the market is in premium, the forward price of a futures contract is higher than the spot price.Conversely, when the market is in Spot premiumthe forward price of a futures contract is lower than the spot price.

What is futures premium?

Contango is a When commodity futures prices are higher than spot prices. Another way for traders to profit from the contango market is to trade spreads.

How do you handle contango?

Consider your trading strategy.One way to trade contango is Go short or sell at the spot price, then go long or buy further contracts. This locks in a higher ask price and a lower bid price.

Will Uvxy decay?

Due to the rollover and contango effects of futures, The price of UVXY decays over time. This means that it is not suitable for a long-term buy-and-hold strategy, but rather a very short-term bet on price volatility. Traders can also take the opposite of UVXY, which is SVXY.

Why are there contango in Bitcoin futures?

This is a bit unusual because in a « normal » futures market, the opposite is true — called « contango. »Contango spreads in most markets Because prices are expected to increase over time (Ostensibly due to inflation and other market factors).

How do you determine if a future is in backwardation or 1 pip in contango?

key takeaways

1. Contango is when the futures price is higher than the expected future spot price. …
2. Normal backwardation is when the futures price is lower than the expected future spot price. …
3. The futures market is normal if the futures price is higher for the longer period, and reverses if the futures price is lower for the longer period.

What is the difference between spot price and futures price?

The spot price of an item is its current cash cost for immediate purchase and delivery. …the difference between the spot price and the futures price in the market is called Base.

Why do spot and futures prices converge?

Subsequent purchases of the underlying asset lead to an increase in overall demand for the asset, which in turn leads to an increase in the spot price of the underlying asset.Futures and spot prices will slowly converge as arbitrageurs continue to do so until they are equalor nearly equal.

What is the difference between spot premium and normal spot premium?

Backwardation: The situation in which the futures price is lower than the current spot price. Normal Backwardation: A situation where the futures price is lower than the expected spot price. The term negative arbitrage means spot premium.

Is the VIX a contango?

$VIX futures term structure in contango, $VVIX index decline Beyond 8 to 111, @RussellRhoads broke the February VIX USD options trade as February VIX USD futures remained higher than the previous month.

What is futures premium?

Contango is a When commodity futures prices are higher than spot prices. Contango typically occurs when the price of an asset is expected to rise over time.

Is Spot Concession Good for Gold?

Therefore, investors can observe the backwardation in the gold market because This could signal a supply-demand imbalance for the yellow metal. . . Investors should not view this as a bullish indicator of supply shortages in a low interest rate environment.

What are Gold Futures?

Gold futures are Standardized exchange-traded contracts in which the contract buyer agrees to accept deliveryfrom a seller, a specified quantity of gold offered at a predetermined price on a future delivery date.

Is backwardation good for oil?

According to Gamma Point managing partner Rahul Rai, Spot premium is hardly a bullish sign. That said, this situation may represent pessimism among institutions.

What is the future of oil prices?

EIA predicts Brent crude oil prices will Average $71/bbl in H2 2021 $66/barrel in 2022. As more people get vaccinated against COVID-19, demand has increased and so have prices. OPEC has gradually ramped up oil production after curbing oil output due to reduced demand for oil during the pandemic.

What exactly is the oil futures premium market?

contango market When immediate crude oil prices are lower than prices farther into the future. There are futures contracts every month for many years. These prices reflect current and future market expectations for oil prices.