Definition
Backwardation
Backwardation is when futures trade below the spot price, often signalling bearishness or heavy dividends.
In backwardation the futures price sits below spot — the abnormal state for equities. It can appear when traders are aggressively short, when a stock is about to pay a large dividend (which reduces the futures fair value), or when there is heavy selling pressure in the futures segment.
On the NSE, persistent backwardation in a stock future is read as a bearish signal, and arbitrageurs may do a reverse cash-and-carry — buy futures, sell spot — to capture the gap. As with contango, the spread collapses to zero by expiry as the two prices converge.
Related terms
- ContangoContango is when futures trade above the spot price, the normal state reflecting the cost of carry.
- Cost of CarryCost of carry is the net cost of holding an asset to a future date, comprising financing cost less any income, and it determines the fair-value difference between a futures price and the underlying spot price.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.