What Is ‘Contango’ and ‘Backwardation’ in the Context of Futures and Perpetual Contracts?

Contango is a market condition where the price of a futures or perpetual contract is higher than the spot price of the underlying asset. This typically occurs in normal markets where carrying costs (like storage or interest) are factored in.

Backwardation is the opposite, where the contract price is lower than the spot price. Backwardation is less common and often suggests that traders expect the spot price to fall before the contract's expiration or that there is a high immediate demand for the underlying asset.