Roll Yield

What Is Roll Yield?

Roll yield is the amount of return produced in the futures market after an investor rolls a short-term contract into a longer-term contract and profits from the convergence of the futures price toward a higher spot or cash price. Roll yield is positive when a futures market is in backwardation, which happens when a futures contract trades at a higher price as it approaches expiration, compared to when the contract is further away from expiration.

Understanding Roll Yield

Roll yield is a profit that can be created while investing in the futures market because of the price difference between futures contracts with various expiration dates. At the point when investors purchase futures, they have both the right and the obligation to buy the asset underlying the futures investment at a predetermined date from here on out, except if they sell their position (to offset the long futures position) ahead of the delivery date.

Most futures investors would rather not take delivery of the physical asset that the futures investment addresses, so they close the position before expiration or roll their close term lapsing futures investments into other futures contracts with expiration dates further from here on out. Rolling the position permits the investor to keep up with their investments in the assets without taking physical delivery.

Backwardation versus Contango

At the point when the market is in backwardation, the future price of an asset is below the expected cash or spot price. In this case, an investor profits when the position is rolled to the contract with a later expiration date in light of the fact that the investor is successfully paying less money than expected by the spot market for the underlying asset that the futures investment addresses.

For instance, envision that an investor holds 100 crude oil contracts and needs to buy 100 again for expiration sometime in the future. In the event that the contract's future price is below the spot price, the investor is really rolling into a similar quantity of an asset for a lower price.

Negative roll yield happens when a market is in contango, which is something contrary to backwardation. At the point when a market is in contango, the future price of the asset is over the expected future spot price, thus the investor will lose money while rolling contracts.

Returning to the case of an investor with 100 oil contracts, to roll into 100 oil contracts with a later expiration date as the contract approaches expiration, the investor will pay more money for the oil contracts compared to the spot market. They would, in this manner, need to pay more money to keep up with similar number of contracts. Negative roll yields have some of the time prompted critical losses by hedge funds and [exchange traded funds that hold futures](/ware etf).

Features

• Roll yield is the return from adjusting a futures position from one futures contract to a longer-dated contract.
• At the point when the market is in contango, the longer-term contracts are more costly than short-term contracts and roll yield will be negative.
• Positive roll yield exists when a futures market is in backwardation, which happens when the short-term contracts trade at a premium to longer-dated contracts.