Roll Costs

Futures contracts expire, so anyone who wants to hold futures exposure for longer than one contract must roll: close the expiring contract and open a later one. Each roll has direct costs, such as commissions and the spread, and an indirect effect from the price difference between the two contract months. Over many rolls, these add up and can explain why a futures based investment performs very differently from the spot price it tracks.

The two parts of roll cost#

Transaction cost#

Rolling means two trades. Rolling with a single calendar spread order, buying one month and selling the other as a package, usually costs less than two separate orders because the spread on the package is tight and you avoid the market moving between legs. See Calendar Spreads in Futures.

The curve effect#

When later contracts trade above nearer ones, the market is in Contango. A long position rolls by selling the cheaper expiring contract and buying the more expensive later one. If the spot price stays flat, the later contract tends to drift down towards spot as it approaches expiry, and the long position loses value. When later contracts trade below nearer ones, in Backwardation, rolling a long position tends to add return.

This simplified example ignores changes in the curve over time, but the direction is right: persistent contango is a drag on long futures holders.

Who is affected#

• Commodity ETFs holding futures, such as oil or natural gas funds. Long periods of contango have caused large underperformance compared with spot prices.
• Volatility products based on VIX futures, where the VIX futures curve is usually in contango, creating a strong drag on long volatility ETPs.
• Long term futures traders holding positions through many rolls.
• Short positions benefit from contango in the same way long positions are hurt.

See Roll Yield for how professionals measure this effect.

Roll costs in stock index futures#

Index futures usually trade slightly above spot because of interest rates minus expected dividends. Rolling a long index future costs roughly the financing rate minus dividends over the period, similar to what holding the stocks with borrowed money would cost. This is not a hidden loss so much as the price of leverage built into the contract.

Managing roll costs#

1. Roll with spread orders rather than two outright trades.
2. Roll when liquidity has moved to the next contract, usually a few days before expiry, not on the last day.
3. Check the curve before taking long term futures positions; persistent contango means you must beat the roll drag.
4. Understand fund structures before holding commodity or volatility ETPs for long periods.
5. Consider later contracts or spot alternatives when the front of the curve is very steep.

Frequently asked questions#

What is a roll cost?#

The cost of moving a futures position from an expiring contract to a later one, including trading costs and the effect of the price difference between the months.

Why do commodity ETFs lose value when prices are flat?#

Often because they hold futures in contango and lose value each time they roll into more expensive later contracts.

Does rolling ever make money?#

In backwardation, rolling a long position can add return because the later contract is cheaper and tends to rise towards spot as it nears expiry.