This is a technical term that you may have come across if you are interested in the Commodity trading with futures are interested in. In this article, we show you exactly what contango means.
Contango definition
With futures, investors can Agreement on a future delivery of a raw material. A price is agreed in the process. There is a fixed key dateon which payment and delivery are due.
Contango is a kind of Surcharge. The price of a futures contract on the underlying asset is higher than the current spot price. Underlyings can be, for example Raw materials or Currencies be.
A contango situation therefore occurs when rising prices in the underlying are expected. The reasons for this can be manifold. The price increases depending on the time elapsed.
Contango is not a special case, but rather the usual case. In the pricing process Costs incurred The price includes additional costs such as the storage of the raw material or necessary insurance. A surcharge is applied to cover these costs.
Investor expectations can also play a role and influence the price. Contango can therefore occur when the Participants of the market assume that the spot price of a particular commodity will rise in the future.
For the investor, contango situations can positive or negative consequences have. Roll losses or profits can therefore occur with long or short positions. Contango does not play a role for day traders due to the short time periods involved.
Hold a Long position In the case of futures, you can use the difference between the spot price and the futures price in the event of contango. lose. If you Short the opposite occurs. You can calculate the difference between the two prices Win.
Conclusion: Contango situation explained
A contango occurs when the Forward rate above the current spot rate or spot price. The further in the future the cut-off date is, the higher the price. Such higher prices are due to costs incurred, such as storage costs or insurance for holding and storing the raw material.