---
description: "Commodity futures roll-yield strategy that goes long backwardated and short contangoed futures based on the ratio of front-month to second-month prices."
tags: [commodities, futures, roll-yield, term-structure, carry]
---

# Roll Yields

**Section**: 9.1 | **Asset Class**: Commodities | **Type**: Carry / Term Structure

## Overview
When commodity futures are in backwardation (downward-sloping term structure), long futures positions generate positive roll yield because as contracts approach expiry they roll up toward the higher spot price. In contango (upward-sloping term structure), the roll yield is negative. A zero-cost long-short portfolio can be constructed by going long commodities in backwardation and short those in contango.

## Construction / Mechanics
Define the backwardation/contango ratio for each commodity:

```
φ = P₁ / P₂                                                  (454)
```

where P₁ is the front-month futures price and P₂ is the second-month futures price.

- φ > 1: backwardation (front-month > second-month); long futures position earns positive roll yield
- φ < 1: contango (front-month < second-month); short futures position earns positive roll yield

**Portfolio construction:**
- Rank all N commodity futures by φ
- Buy futures with higher values of φ (stronger backwardation)
- Sell futures with lower values of φ (deeper contango)
- Dollar-neutral (zero-cost) implementation

Roll yield is realised when the near-expiry contract is sold (covered) and a longer-dated contract is purchased, or vice versa for short positions.

## Return Profile
Profits from the periodic rolling of positions: as a backwardated contract approaches expiry, its price converges upward to the spot, generating a positive roll return. In contango the opposite holds and short positions benefit. Roll yield is distinct from spot price returns.

## Key Parameters / Signals
| Parameter | Description |
|-----------|-------------|
| φ = P₁/P₂ | Backwardation ratio; φ > 1 → backwardation, φ < 1 → contango |
| Ranking quantile | Top/bottom quantile cut-off for long/short selection |
| Roll frequency | Determined by contract expiry calendar |

## Variations
- Extend the ratio beyond the first two contracts to capture the broader term structure slope.
- Combine with hedging pressure (Section 9.2) or momentum signals for a multi-factor commodity strategy.

## Notes
- Roll yields can be substantial in commodities with high storage costs (energy) or seasonal supply/demand patterns (agricultural).
- The ratio φ is a snapshot measure; persistent backwardation or contango is more reliable than transient conditions.
- Transaction costs from rolling (bid-ask spreads on each roll) must be weighed against the expected roll yield.
- Convenience yield (the benefit of holding physical inventory) is the economic driver of backwardation in many commodity markets.