Definition of Contango:
Securities: Carry-over of the settlement of an account on stock exchange to a future period. Such postponement requires payment of interest on the amount carried over.
Commodities: Common market situation where the prices get progressively higher in the future delivery months, reflecting carrying costs and creating negative spreads. Opposite of backwardation.
The normal situation in which the spot or cash price of a commodity is lower than the forward price.
Contango is a situation where the futures price of a commodity is higher than the spot price. Contango usually occurs when an asset price is expected to rise over time. That results in an upward sloping forward curve.
Futures contract supply and demand affect the futures price at each available expiration. In contango, investors are willing to pay more for a commodity in the future. The premium above the current spot price for a particular expiration date is usually associated with the cost of carry. Cost of carry can include any charges the investor would need to pay to hold the asset over a period of time. With commodities, the cost of carry generally includes storage costs and depreciation due to spoiling, rotting, or decay in some cases.
How to use Contango in a sentence?
- Contango tends to cause losses for investors in commodity ETFs that use futures contracts, but these losses can be avoided by buying ETFs that hold actual commodities.
- The opposite condition, one that obtains when the market quotes a higher price for a more distant and a lower price fore the nearby delivery date is known as contango.
- In all futures market scenarios, the futures prices will usually converge toward the spot prices as the contracts approach expiration.
- Contango is a situation where the futures price of a commodity is higher than the spot price.
- Advanced traders can use arbitrage and other strategies to profit from contango.
Meaning of Contango & Contango Definition