Rolling Futures Contracts
Futures expire. To hold for the long run, you close the near month and buy a later month before expiry, which costs money in contango.
Risk warning: forex, CFDs, options, futures and crypto assets usually involve leverage or high volatility, and you can lose more than you put in. This lesson only teaches the concepts; all numbers are for illustration and are not investment advice.
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Text version · Futures Basics, lesson 6: “Rolling Futures Contracts”
Futures expire. To hold for the long run, you close the near month and buy a later month before expiry, which costs money in contango.
Sell the near month, buy the far month
Contracts expire. To keep holding, you have to roll before expiration: close the contract that's about to expire and buy the next month at the same time.
Roll losses in a contango market
In contango the far month costs more, so longs “sell low, buy high” each time, and the new contract slides back toward spot as it expires. Month after month, the losses pile up.
Backwardation: rolling actually makes money
In backwardation the far month is cheaper, so longs “sell high, buy low” each time, and the new contract rises back toward spot as it expires. So for the same long bet, futures can return more or less than spot.
Key takeaways
- Rolling: sell the contract about to expire and buy the next month's contract at the same time.
- In contango (later months pricier), longs "sell low, buy high" at every roll, and the new contract drifts back down to spot, causing a steady roll loss over time.
- In backwardation, rolling actually earns longs money.
- So the long-run return on holding commodity futures ≠ the spot price change; you must add (or subtract) the effect of rolling.
Try it yourself
You can do these exercises in this lesson's interactive simulation:
- Click “Example: near month $80 / far month $82”: how much extra did this roll of 1 contract (1,000 barrels) cost?
- Press ▶ to run all 12 months: spot returns $0, so what's the cumulative result for long futures?
- Switch to “Backwardation” and play again: is rolling now a cost or a gain?
- Set the spread to $0.5 and then $4, and compare the cumulative roll loss after a year.
Quiz and explanations
- 1. In contango with the near month at $80 and the next month at $82, roughly what does it cost a long to roll 1 contract (contract size 1,000)?
- Answer: $2,000.You pay $2 more per barrel × 1,000 = $2,000.
- 2. Why can holding commodity futures long-term underperform spot?
- Answer: Repeated roll losses in contango.Every roll buys the next month at a higher price.
- 3. Spot never changes, and futures sit $1 per barrel above it each month. A long position of 1 crude oil contract (1,000 barrels) rolls 12 times in a year. Roughly what's the total roll loss?
- Answer: $12,000.Each roll loses $1 × 1,000 barrels = $1,000, so 12 rolls cost $12,000.
Terms in this lesson
- backwardation (Backwardation): A market where futures (or later months) trade below spot (or nearer months).
- contango (Contango): A market where futures (or later months) trade above spot (or nearer months).
- roll (Roll): Closing a contract that's about to expire and opening the next month's contract to keep the position going.