Futures markets

Roll Yield (Roll return, roll effect)

Roll yield describes the return effect that arises when a futures position is held across several expiry dates and rolled regularly. With an otherwise unchanged futures curve, contango has a negative effect on long positions, backwardation a positive one.

Calculation and mechanics

Futures have an expiry date. Anyone who wants to hold a position longer therefore closes the expiring contract and opens a later one. The roll itself does not automatically cause a gain or loss because both contracts trade at their respective market prices.

The roll effect rather arises from how futures prices move along the term structure. In contango later contracts trade higher than near-term ones. If the shape of the curve stays unchanged, a held contract approaches the lower front end of the curve as its time to expiry shrinks. For a long position this results in a negative roll yield. In backwardation the effect works the other way round.

For futures strategies rolled over a longer period, this roll effect can make up a substantial part of the return. Futures-based commodity products can therefore develop quite differently from the spot price of the underlying commodity over longer periods.

As a rough approximation the gap between the first and second futures contract can be annualised. This calculation assumes that the shape of the futures curve stays unchanged. In practice it changes constantly, so the value only serves as a guide.

Roll yield p.a. ~ (price 1st contract / price 2nd contract - 1) x 365 / days between expiries x 100

Distinction

Contango and backwardation describe the shape of the futures curve. Roll yield, by contrast, describes how this shape can affect the return of a position held across several expiries.

A roll in options trading means something different: there an existing options position is moved to a different strike, a different expiry or both.

A Continuous Future links several futures contracts into one continuous price series. Depending on the adjustment method, price jumps at the contract switch can be removed or kept. Not every continuous future series is therefore equally suitable for calculating actual returns.

Related terms

All terms in the glossary

All market and analytical information is provided for educational and analytical purposes only and does not constitute investment advice or a trading recommendation.