Definition
Roll Yield
Roll yield is the gain or loss a futures investor earns from rolling an expiring contract into a later one, positive in backwardation and negative in contango.
Commodity investors who hold futures must roll before expiry by selling the front month and buying the next. In backwardation the next contract is cheaper, so rolling adds a positive roll yield; in contango it costs more, dragging returns.
Roll yield explains why a commodity ETF or MCX position can lose money even when spot prices are flat or rising, if the curve is in persistent contango. It is a crucial, often overlooked component of total commodity returns.
Related terms
- Spot vs Futures (Commodity)The spot price is for immediate delivery of a commodity, while the futures price is agreed today for delivery later; the gap reflects storage, financing and convenience costs.
- Contango / BackwardationContango is when futures prices are higher than spot (upward-sloping curve), and backwardation when they are lower (downward-sloping), reflecting storage costs versus supply tightness.
- MCX Lot SizeThe MCX lot size is the standardised minimum quantity of a commodity per futures contract, which determines the contract value and margin required to trade.
- 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.