BTL 857 - Contango

 

The Banking Tutor’s Lessons

BTL 857                                                                                                06-01-2026

Contango

Contango most commonly refers to a market condition in futures trading where the price of a futures contract is higher than the current spot price of the underlying asset.

The prices of the futures contracts fluctuate because of the demand and supply of the contracts. When talking about Contango, the investors are ready to pay more in the future. The premium above the current spot price for a particular expiration date is usually associated with the cost of carry.

Causes for Contango

Storage & Insurance: Physical commodities (oil, gold) incur costs to store and insure, adding to future prices.

Inflation: Expected future inflation raises the cost of holding assets.

Demand/Supply: Anticipation of future shortages or increased demand.

Interest Rates: For financial assets, higher interest rates than dividend yields can drive contango.

This is often the "normal" state for non-perishable commodities (like gold or oil) because the futures price must account for the cost of carry—the expenses related to storage, insurance, and interest paid to hold the physical asset until delivery.

As a futures contract nears its expiration date, its price will typically fall to meet the spot price.

Super Contango: A situation where the spot price is significantly lower than futures prices, often due to an extreme oversupply and a lack of available storage space.

Backwardation is the opposite of Contango. The reverse situation—where the spot price is higher than futures prices—is known as backwardation.

Historically, "contango" referred to a fee paid by a buyer to a seller on the London Stock Exchange to defer the settlement of a stock purchase until the next account period.

Near the expiration, Contango brings Arbitrage opportunities. Arbitrage refers to a strategy where one makes a profit because of the difference between the prices of two markets.

Example of Contango situation

An example of Contango in the stock market would be if a futures contract for a particular stock is trading at Rs. 110 per share for delivery in 3 months, while the current market price for that stock is Rs. 100 per share. This would indicate that the market expects the price of the stock to increase over the next 3 months, and the futures price reflects that expectation.

Investors can take advantage of this situation by buying the stock at the current market price of Rs. 100 per share and simultaneously selling a futures contract for delivery in 3 months at Rs. 110 per share. This would lock in a profit of Rs. 10 per share, which is the difference between the current market price and the futures price.

Factors lead to Contango

Factors like a rise in inflation in near future, anticipated future supply disruptions and the carrying cost of the instrument influence the market which results in Contango.

Sekhar Pariti

+91 9440641014