Roll Yield
Candlefocus EditorTo achieve this, a trader can buy a futures contract at a lower price and then sell a different longer-dated contract at a higher price when taking profits. This is a portable strategy known as a roll yield because the profits are obtained without selling the underlying asset by simply adjusting the expiration date of the contract. As the same asset is involved in both transactions, the gains are made without ever having to purchase or sell the underlying asset.
Roll yield can also be viewed as an opportunity cost as a trader could also choose to sell the current contract and use the money from that sale to buy the longer contract. This, however, would require that they wait until the current contract has expired before they could take their profits. While the longer-term positions are often more expensive, the cost of having to wait can sometimes be greater.
When the market is in contango, which is the opposite of backwardation, the longer-term contracts are normally more expensive than short-term contracts. In this case, roll yield will be negative, meaning a trader will have to pay to shift their futures position to the longer contact. It is also worth noting that roll yield can also be impacted by look-ahead bias, which comes into when the long-term contract is changed to one in the future. The new contract will have different pricing, sometimes higher, and this can impact the position of the trader.
It is also important to note that, during volatile markets, the roll yield is likely to be more pronounced. This makes it of particular interest to traders that like to take advantage of extreme market conditions.
In conclusion, roll yield is a form of arbitrage that can be used to capitalize on the opportunities to earn a return available in different future contracts on the same asset. It is important for traders to understand how it works and the implications it can have in different market conditions.