Definition
Contango describes a futures market in which contracts for later delivery are priced above nearer-dated contracts and the spot price. The futures curve then slopes upward as maturity lengthens.
How it works
It often reflects the cost of carry: financing, storage and insurance for holding the physical good until later delivery. A fund or trader who wants continuous exposure must roll, selling the expiring contract and buying the next one, and in contango the next contract costs more.
If the curve keeps its shape and spot is unchanged, a long futures position tends to lose value as it converges down toward spot, called negative roll return. Roll return is only one component of results: spot changes can easily outweigh it in either direction, so contango says nothing certain about where spot will go.
Formula / convention
Approximate roll return per roll (long position) = (expiring contract price − next contract price) ÷ expiring contract price; contango makes it negative
Illustrative example
Illustrative: a fictional commodity's expiring contract trades at 75.00 and the next contract at 75.75. Rolling a long position means selling at 75.00 and buying at 75.75, a roll return of (75.00 − 75.75) ÷ 75.00 = −1.0%. If the whole curve then rises 3.0%, the approximate combined result is 3.0% − 1.0% = +2.0%; if it falls 3.0%, it is −3.0% − 1.0% = −4.0%.
What to watch for
Contango describes today's price curve; it is not a forecast of spot prices or a guaranteed loss for long futures holders. Roll costs, fees and curve shapes change by contract and period, so products that roll futures can differ materially from the spot price.