What is contango
Contango is a market state in which a futures contract trades above the current spot price, and contracts for later delivery months usually trade higher still.
A futures contract is an agreement to buy or sell an asset at a set price on a later date. The spot price is the price for immediate delivery.
Worked example (hypothetical)
Take a commodity whose spot price we will call S.
| Delivery | Price |
|---|---|
| Spot (now) | S |
| Front-month future | a little above S |
| Next month | higher than the front month |
| Later months | higher again |
The curve slopes upward from left to right, so the market is in contango. A trader who holds a long futures position and rolls it forward sells the expiring contract and buys the next, more expensive one. Each roll costs money if the curve keeps this shape. This loss from rolling is called negative roll yield. See futures roll and front month.
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Formal definition
Under the cost-of-carry model, a fair futures price is:
F = S × e^((r + u − y) × T)
- r: interest rate (financing cost)
- u: storage and insurance costs
- y: convenience yield (the benefit of holding the physical asset)
- T: time to expiry
When r + u exceeds y, F sits above S, and the market is in contango. Stored commodities such as metals, and crude oil when supply is plentiful, often show this shape.
Edge cases experienced traders should know
- Normal contango vs contango. In older economic usage, "normal contango" compares the futures price with the expected future spot price, not today's spot price. News and platforms almost always use the simpler meaning.
- Partial contango. A curve can be upward-sloping in some months and downward-sloping in others.
- Super contango. A very steep curve, typically when storage is scarce and spot demand is weak.
- Volatility futures. Volatility index futures are often in contango. Products that hold them can lose value steadily through the roll. See exchange-traded product.
- Forex. Currency forwards price in the interest-rate gap through forward points and covered interest parity. The idea is related, but the word contango is rarely used there.
Contango vs backwardation
| Contango | Backwardation | |
|---|---|---|
| Futures vs spot | Futures above spot | Futures below spot |
| Curve shape | Upward-sloping | Downward-sloping |
| Usual cause | Carry costs dominate | Tight supply, high convenience yield |
| Roll for longs | Tends to cost | Tends to add |
Where you see the term
- Commodity reports and news on oil, gas and metals, often described as the "shape of the curve". See energies and metals.
- Exchange futures price tables listing several delivery months side by side.
- Fund documents for commodity and volatility products that explain roll costs.
- On CFD platforms, spot-style commodity CFDs may carry overnight swap fees, and futures-based CFDs may show price adjustments at rollover. Check the contract specifications on the platform you use.
Leveraged CFD and futures trading can lose money fast. Curve shape does not tell you where prices will go. See risk management.
Related terms
Derivatives · Forward contract · Commodity · Cash vs physical settlement · Trading glossary
Frequently asked questions
What does contango mean in simple words?
Contango means a later delivery costs more than buying now. Futures prices sit above the spot price.
Is contango bullish or bearish?
Neither by itself. It mostly reflects carry costs such as financing and storage, not a price forecast.
What is the difference between contango and backwardation?
In contango, futures trade above spot. In backwardation, futures trade below spot.
Why does contango hurt long futures holders?
Each roll means selling a cheaper expiring contract and buying a dearer later one. That repeated cost is negative roll yield.
Can a market switch from contango to backwardation?
Yes. Changes in supply, storage capacity or interest rates can change the curve's shape.