ROLL YIELD EXPLAINED
If you hold a long futures position past its expiration, you have to roll it. The cost or profit of that roll is roll yield — and over time it can dwarf the directional P&L.
Every futures contract has an expiration. To hold exposure beyond that, you close the expiring contract and open the next one. The price difference between the two contracts is what creates roll yield.
If the front-month contract is more expensive than the back-month (backwardation), rolling a long position is profitable — you sell high and buy low. If the front is cheaper than the back (contango), rolling a long is costly — you sell low and buy high. The opposite holds for shorts.
Crude oil and natural gas have lived in steep contango for years, which is why retail products that hold front-month futures (like USO) chronically underperform spot crude. Conversely, gold and many soft commodities tend toward backwardation in tight markets, rewarding long-term holders of front-month exposure.
Before holding any futures position more than a few weeks, look at the term structure. If you'd be paying 1% per month in roll cost, that's a 12% annual headwind your directional thesis has to beat just to break even. Sometimes spreading the position across multiple expirations or using a longer-dated contract reduces the bleed.
Takeaways
- →Backwardation rewards long holders; contango punishes them.
- →Crude and natural gas have historically been deep contango — beware long-only ETFs.
- →Check term structure before committing to a multi-week futures hold.
- →Roll yield can dwarf the directional component of returns.