Roll Yield

What is a 'Roll Yield'

A roll yield is the amount of return generated in a backwardated futures market that is achieved by rolling a short-term contract into a longer-term contract and profiting from the convergence toward a higher spot price. Profiting from roll yield is a common goal for many strategies used by traders in the futures market.

BREAKING DOWN 'Roll Yield'

Backwardation occurs when a futures contract will trade at a higher price as it approaches expiration compared to when the contract is farther away from expiration. Rolling into less expensive futures contracts allows the trader to consistently profit from the rise in a futures' price as it nears expiration.

The biggest risk to this strategy is that the market will shift to contango (opposite as backwardation). This type of changing market has led to major losses by various hedge funds in the past and is the reason why it should only be attempted by experienced traders.

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RELATED FAQS
  1. What's the best way to play backwardation in the futures market?

    Backwardation is a market condition in which a futures contract far from its delivery date is trading at a lower price than ... Read Answer >>
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    Find out more about derivative securities, how to roll forward a derivative contract and what it means when a derivative ... Read Answer >>
  3. How can traders use contango to take advantage of the storage shortage for crude ...

    Learn how traders can profit in oil markets with a contango forward term structure by storing oil, and understand how other ... Read Answer >>
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  5. I want to roll over a portion of my retirement plan with my employer and I have been ...

    This is based on the rules that an individual can roll over a portion of his or her retirement plan balance, rather than ... Read Answer >>
  6. Why do futures' prices converge upon spot prices during the delivery month?

    It's a fairly safe bet that as the delivery month of a futures contract approaches, the future's price will generally inch ... Read Answer >>
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