What Is Roll Yield?
Let me explain roll yield directly: it's the return you can get as an investor by shifting from a short-term futures contract to a longer-term one, mainly when the market is in backwardation. This setup can be profitable if futures prices are below expected spot prices, but watch out for risks in contango markets where the opposite holds.
Key Takeaways on Roll Yield
Roll yield comes from adjusting your futures position by moving to a longer-dated contract. You see positive roll yield in backwardation, with short-term contracts at a premium over longer ones. In contango, it's negative because longer contracts cost more. As a trader, you often roll to skip physical delivery as expiration nears. Remember, rolling costs include the price gap between contracts plus any fees.
How Roll Yield Affects Your Futures Investments
Roll yield is essentially the profit you gain from price differences in futures contracts with different expirations. When you buy futures, you're committed to purchasing the asset later unless you sell out first. Most of us don't want actual delivery, so we close or roll into farther-out contracts to keep the position open without the hassle.
In 2022, traders handled 29.3 billion futures contracts globally, showing just how active this space is.
Backwardation vs. Contango in Futures Markets
In backwardation, the futures price sits below the expected spot price, so you profit by rolling to a later contract—you're paying less than spot for the same asset. Take 100 crude oil contracts: if futures are cheaper than spot, you're rolling into the same amount at a discount.
Contango flips this—futures prices exceed expected spot, leading to negative roll yield and losses on rolls. For those same 100 oil contracts, you'd pay more to maintain your position, which has burned hedge funds and ETFs in the past.
What Does Rolling a Futures Contract Mean?
Rolling means extending your futures contract past its expiration to capture market price shifts. You settle any gains or losses from the original before moving on.
Calculating Roll Yield for Futures
You calculate roll yield as the chance to profit by buying long-term and selling short-term contracts. It's the total change in futures prices minus the total change in spot price.
The Cost of Rolling Futures
To roll, sell your near-term contracts and buy later ones—the cost is the price difference plus trading and commission fees.
The Bottom Line on Roll Yield
Roll yield emerges when you shift short-term futures to longer ones, boosting returns in backwardation as prices converge to spot, but causing losses in contango. Always check if the market is in backwardation or contango to manage your positions effectively and optimize what you get out of them.
