What are Contango and Backwardation in Futures?

Contango and backwardation describe the relationship between an asset’s “spot price” and its “futures prices” across different expiries. Let’s understand Contango vs Backwardation in detail:

A) Contango

A market is in contango when futures prices are higher than the current spot price. For example, assume that the:

• Spot price: ₹10,000
• 1-month futures: ₹10,200
• 3-month futures: ₹10,500

In this case, the futures curve is generally “upward sloping” and represents the Contango market. Generally, Contango can arise from factors such as financing costs, storage costs, insurance, and expectations about future supply and demand.

B) Backwardation

A market is in backwardation when futures prices are lower than the current spot price.

For example, assume that the:

• Spot price: ₹10,000
• 1-month futures: ₹9,800
• 3-month futures: ₹9,500

In this case, the futures curve is generally “downward sloping” and represents the 

Backwardation market. It can occur when the:

• Current demand for an asset is strong relative to the available supply

or 

• Market participants place a higher value on immediate delivery than future delivery.

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Contango and backwardation compare futures prices with spot prices across different expiries. Trade246 gives you access to the NFO segment for Futures & Options trading, along with real-time market prices to study futures price movements.

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