Definition
Contango
Contango is when futures trade above the spot price, the normal state reflecting the cost of carry.
In contango, the futures price is higher than spot and farther-month contracts cost more than nearer ones. This is the typical condition in equity markets because holding the underlying involves financing costs that the futures price builds in over time.
For NSE traders, contango means a long futures position slowly loses the premium back toward spot as expiry approaches, while it benefits cash-and-carry arbitrage. It is the opposite of backwardation, and the size of the contango reflects interest rates and the time to expiry.
Related terms
- BackwardationBackwardation is when futures trade below the spot price, often signalling bearishness or heavy dividends.
- 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.