Contango

The intuition

Imagine three ways to own the Nifty in two months’ time: buy the shares now, buy the one-month future and roll it, or buy the two-month future. All three deliver the same exposure, so they must cost the same once interest and dividends are counted. Buying the shares ties up cash for two months; buying the two-month future does not, so the future must be dearer by two months of interest, less two months of dividends. The one-month future sits in between. Line the three prices up and they slope upward with time. That upward slope is contango.

For an equity index, contango is the default state because interest rates in India exceed the index’s dividend yield. For commodities the logic is the same but the carry includes storage, insurance and financing, and it can flip to the opposite state when the physical commodity is scarce today.

Formula

Fair price of expiry n = spot × e^{(r − q) × T_n}

Curve is in contango when F_far > F_near > spot; the calendar spread F_far − F_near is the cost of carrying the position from one expiry to the next

Roll cost per roll = (F_far − F_near) × lot size, paid by longs, received by shorts

Worked example (illustrative numbers)

Suppose NIFTY is at 24,000, financing is 6.5%, dividend yield 1.2%, and three monthly contracts trade with 30, 58 and 93 days to expiry.

Contract	Days	Fair price	Above spot	Spread to previous
Spot	0	24,000
Near month	30	24,105	+105	+105
Next month	58	24,203	+203	+98
Far month	93	24,326	+326	+123

A trader long one lot (65 units) who rolls from near to next month at fair value pays about 98 points, ₹6,370, for one more month of exposure. Held for a year through twelve rolls, the carry is roughly 5.3% of notional, which is exactly the financing rate less dividends. Contango is not a loss; it is the interest the futures buyer would otherwise have earned. It becomes a cost only when the trader compares futures returns with the index level and forgets the carry was always there.

Why it matters to an options trader

• Later expiries price off higher forwards. A 24,000 call for the far month is struck below a 24,326 forward and is therefore in the money in forward terms; comparing premiums across expiries without the curve misreads moneyness.
• Calendar spreads in options inherit it. The difference in forward prices is part of why a far-month call costs more than the near-month one, beyond time value alone.
• Steep contango flags crowding. When the spread between months widens well beyond the carry, leveraged longs are paying up to stay in; it has often preceded sharp unwinds.
• Commodity options differ. On MCX, crude oil and natural gas curves swing between contango and backwardation with inventories; the option is on the future, so the curve state directly sets the strike’s moneyness.

Common mistakes

• Calling contango bullish. It is the normal state for an equity index; only the excess over carry carries information.
• Ignoring roll cost in long-horizon futures positions. A year of rolls costs the carry; compare with holding the shares or an index fund.
• Comparing far-month option premiums with near-month at the same strike. The forwards differ; compare at equal distance from each forward.
• Assuming commodity curves behave like index curves. Storage and scarcity, not interest, drive them.

Indian-market specifics

• NSE lists three monthly index futures at any time (near, next, far), expiring on the last Tuesday of each month, so the visible curve has three points plus spot. Weekly index options exist, but there are no weekly index futures.
• Because the Indian policy rate and short-term funding rates exceed the Nifty’s dividend yield, Nifty and Bank Nifty futures are in contango almost always; discounts appear briefly around heavy selling or dividend clusters.
• On MCX, crude oil and natural gas futures follow international curves and are frequently in backwardation during supply tightness; gold and silver, with pure financing and storage carry, are usually in contango.
• Futures are marked to market daily and settle on T+1; the calendar spread between two months can be traded as a single spread order on NSE, which is how rolls are usually executed.

FAQ

Is contango good or bad for a trader?

Neutral: a cost for longs, income for shorts, informative only when excessive.

Why are Nifty futures almost always in contango?

Financing costs exceed dividend yield, so carry is positive.

What is the difference between contango and backwardation?

Contango slopes up with time; backwardation slopes down.

How much does it cost to roll a Nifty futures long in contango?

The month-to-month spread × 65; about ₹6,370 in the example.

Related terms

• Backwardation, the opposite curve
• Basis, the gap at a single expiry
• Cost of Carry, the source of the slope
• Rollover, where the slope is paid