# Understanding Roll Yield: Scenarios in Futures Markets

## What Is Roll Yield?

Roll yield refers to the returns that investors can achieve by transitioning a short-term futures contract into a longer-term one, primarily when the futures market exhibits backwardation. This financial mechanism can lead to profitable outcomes when futures prices are lower than expected cash prices, although risks exist in markets displaying contango.

### Key Takeaways

*   Roll yield is the return from adjusting a futures position by moving from a short-term contract to a longer-dated one. 
*   Positive roll yield occurs when a futures market is in backwardation, where short-term contracts trade at a premium compared to longer-term contracts.
*   In contango, negative roll yield happens because longer-term contracts are more expensive than short-term ones.
*   Futures traders often roll contracts to avoid taking physical delivery of the underlying assets as contracts near expiration.
*   The cost of rolling futures involves the price difference between contracts plus any trading and commission fees.

## How Roll Yield Impacts Futures Investments

Roll yield is the profit from investing in futures markets, stemming from price differences in contracts with varying [expiration dates](https://www.investopedia.com/terms/e/expirationdate.asp). When investors buy futures, they must buy the underlying asset at a set future date unless they sell their position before the [delivery date](https://www.investopedia.com/terms/d/deliverydate.asp).

Most futures investors do not want to take delivery of the physical asset that the futures investment represents, so they close the position before expiration or roll their near-term expiring futures investments into other [futures contracts](https://www.investopedia.com/terms/f/futurescontract.asp) with expiration dates further in the future. Rolling the position allows the investor to maintain their investments in the assets without having to take physical delivery.

### 29.3 billion

The number of futures contracts traded worldwide in 2022.

## Comparing Backwardation and Contango in Futures Markets

When the market is in backwardation, the future price of an asset is below the expected cash or [spot price](https://www.investopedia.com/terms/s/spotprice.asp). In this case, an investor profits when the position is rolled to the contract with a later expiration date because the investor is effectively paying less money than expected by the spot market for the underlying asset that the futures investment represents.

For example, imagine that an investor holds 100 [crude oil](https://www.investopedia.com/terms/c/crude-oil.asp) contracts and wants to buy 100 again for expiration at a later date. If the contract's future price is below the spot price, the investor is actually rolling into the same quantity of an asset for a lower price.

Negative roll yield occurs when a market is in [contango](https://www.investopedia.com/terms/c/contango.asp), which is the opposite of backwardation. When a market is in contango, the future price of the asset is above the expected future spot price, and so the investor will lose money when rolling contracts.

For the 100 oil contracts example, if an investor wants to roll into contracts with later expirations, they'll pay more than current spot market prices. They would, therefore, have to pay more money to maintain the same number of contracts. Negative roll yields have sometimes led to significant losses by hedge funds and [exchange traded funds that hold futures](https://www.investopedia.com/terms/c/commodity-etf.asp).

## What Does It Mean to Roll a Futures Contract?

Rolling is the practice of renewing a futures contract beyond its original expiration date, allowing the contract holder to benefit from anticipated changes in the market price. In order to roll a contract, traders must first settle the gain or loss of the original contract.

## How Do You Calculate Roll Yield for Futures Contracts?

Roll yield is essentially the opportunity to gain profits by buying long-term futures contracts and selling short-term ones. It is calculated based on the difference in price between two futures contracts, and the spot price of the underlying commodity. It is calculated by the formula (total change in futures prices) - (total change in spot price) = roll yield.

## How Much Does It Cost to Roll Futures?

Futures traders can roll their contracts by selling their near-term contracts and buying new contracts with later expiration dates. The cost is equal to the difference between the two contract prices, plus trading and commission fees.

## The Bottom Line

Roll yield arises when investors roll short-term futures contracts into longer-term contracts, and it can significantly impact returns depending on market conditions. In a market experiencing backwardation, roll yield is positive, enhancing investor profits as the futures price converges with the spot price. Conversely, in a contango market where future prices exceed expected spot prices, roll yield turns negative, potentially leading to losses.

Investors should carefully consider the market structure of backwardation or contango when managing futures positions to optimize their returns.

> **Article Sources**
>
> 1.  Statista. "[Number of Futures and Options Contracts Traded Worldwide from 2013 to 2022](https://www.statista.com/statistics/377025/global-futures-and-options-volume/)."