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Key Takeaways
- Contango describes an upward-sloping segment of the futures curve.
- A calendar spread compares two contract prices at the same observation time.
- The example’s 18.00 deferred price is 1.50 points above the 16.50 near price.
- If the deferred contract later falls from 18.00 to 16.50, one standard VX long loses $1,500.
- A futures index or ETP return follows its contract weights, price changes, rebalancing and product terms.
What is contango?
Contango is a futures curve shape in which a later contract trades above a nearer one, so the deferred-minus-near spread is positive. On the VIX futures curve it means later volatility exposure is priced above near-term exposure, the usual shape when current volatility is calm. A long position bought at the higher deferred price loses if that contract’s price falls as it ages.
How is contango measured?
Subtract the near price from the deferred price. A positive result identifies contango in the compared segment. The example’s VX contracts are 16.50 at 30 days and 18.00 at 60 days. Their calendar spread is 1.50 VIX points, or 8.33% of the deferred price.
That spread describes the curve at one observation time. To calculate profit, follow the selected contract from entry to exit or settlement.
Formula
Curve spread = deferred price − near price; spread as a share of deferred price = (deferred price − near price) / deferred price. Long VX profit = (exit or settlement price − entry price) × $1,000 × contracts.- A positive deferred-minus-near spread identifies contango in the compared segment.
- For 18.00 and 16.50, the spread is 1.50 points, or 8.33% of the deferred price.
- The normalized spread measures curve steepness. Actual return uses the contract’s price path and the chosen capital denominator.
- A roll closes one expiration and opens another; it does not charge the full difference between their notional values as an option-style premium.
Contango example: VX futures profit and loss
Spot VIX is 15.20. Standard VX futures with 30 and 60 days remaining trade at 16.50 and 18.00. Compare two explicit paths: the 60-day contract falls to 16.50 a month later, or the original 30-day contract reaches final settlement at 15.20.
- Calendar spread: 18.00 − 16.50 = 1.50 points
- Spread divided by deferred price: 1.50 / 18.00 = 8.33%
- Path A: buy one VX at 18.00, exit at 16.50; gross P/L = −1.50 × $1,000 = −$1,500
- Path A loss divided by entry notional: $1,500 / $18,000 = 8.33%
- Path B: buy one VX at 16.50, final settlement 15.20; gross P/L = −1.30 × $1,000 = −$1,300
- Path B loss divided by entry notional: $1,300 / $16,500 = 7.88%
The two stated contract paths lose $1,500 and $1,300. Their percentages use entry notional, not posted margin. Neither calculation is the return of a daily rolling ETP; calculate that product from its actual contract weights, price changes and fees.
In the separate front-contract scenario, a 16.50 entry and 15.20 final settlement produce a $1,300 loss. That is 7.88% of the $16,500 entry notional. Account return requires the amount of capital assigned to the position.
How contango affects rolling futures positions and ETPs
A roll closes the current expiration and opens another. Futures positions are margined; the difference between the two contracts’ notional values is not an option premium paid to execute the roll.
For a futures index or exchange-traded product, track the contract weights and each contract’s daily price change. Rebalancing, collateral treatment, leverage and fees follow the index or product specification. This cash-flow record explains the result of continuous exposure.
How traders use contango
Measure the exact calendar segment you intend to trade. Compare its curve with the event calendar and the underlying index’s price action.
For options, compare the selected expiration’s implied volatility, term structure and payoff. Put numbers on that comparison in the options profit calculator: entry cost, breakeven and payoff across price and date, with implied volatility set for the expiration you trade.
Limitations of contango
- Re-read the curve each session before you trade the roll. Contango describes relative prices at one observation time: a deferred contract loses only if its own price falls as it ages, and a volatility spike can lift the whole curve.
- Calculate return from the contract’s path. The normalized spread measures curve steepness, and the 8.33% figure becomes a return only on the stated path and the chosen capital denominator, such as entry notional rather than posted margin.
- Calculate a rolling product from its own terms. A rolling index or exchange-traded product returns what its contract weights, price changes, rebalancing and fees produce.
- Measure each segment. The reading applies to the compared segment, and other segments of the same curve can be flatter, steeper or inverted.
Bottom line
Contango means later futures trade above nearer ones, the usual shape of a calm VIX curve, and a long deferred position loses if its price falls as the contract ages. Measure the exact segment you trade, then judge results from actual entry, exit and settlement prices rather than from the spread alone.
Clear answers
Frequently Asked Questions
Sources and Further Reading
- Cboe: Inside Volatility Trading, Is VIX Backwardation Necessarily a Sign of a Future Down Market
- Cboe: VIX Term Structure
- FINRA Regulatory Notice 17-32: Volatility-Linked Exchange-Traded Products
- Fidelity: Commodity ETFs, Contango and Backwardation
How entries are sourced, calculated and updated: editorial methodology.