ROLL YIELD

Summary

Roll yield is the profit or loss that occurs when a futures trader closes an expiring contract and opens a new one with a later expiration date. This 'rolling' process is necessary because futures contracts have fixed expiration dates, but traders often want to maintain their market position longer. The yield depends on the relationship between the expiring contract's price and the new contract's price. In contango markets (where future prices are higher than current prices), roll yield is typically negative because you're buying the new contract at a higher price. In backwardation markets (where future prices are lower), roll yield is typically positive.

Usage Context

Understanding roll yield is crucial when studying commodity investing, futures trading strategies, ETF performance analysis, and portfolio management involving derivatives. It's particularly important for explaining why commodity ETFs may underperform spot prices over time.

Common Confusions

• Thinking roll yield is always negative - it can be positive in backwardated markets
• Confusing roll yield with the underlying asset's price movement
• Believing that all futures contracts must be physically delivered at expiration
• Assuming roll yield is a fee charged by brokers rather than a market-driven outcome
• Mixing up the direction of roll yield in contango vs. backwardation scenarios