What Is “Contango” and What Does It Imply about the Basis?
Contango is a market condition where the futures price of a commodity or financial asset is higher than the expected spot price at a future date, or where the longer-dated futures contracts are priced progressively higher than the nearer-dated ones. In the context of the basis (Spot – Futures), contango implies a negative basis, as the Futures Price is higher than the Spot Price.
Glossar
Market Condition
Volatility ⎊ Market condition is defined by several key factors, with volatility being a primary determinant of risk and opportunity.
Spot Price
Valuation ⎊ The spot price in cryptocurrency, options, and derivatives represents the current market-clearing price for immediate delivery of the underlying asset, functioning as a fundamental benchmark for pricing more complex instruments.
Futures Price
Valuation ⎊ Futures price, within cryptocurrency and derivative markets, represents a binding agreement to transact an asset at a predetermined future date and price, functioning as a standardized forward contract facilitated by an exchange.
Futures Contracts
Mechanism ⎊ Futures contracts, within cryptocurrency and broader financial derivatives, represent standardized agreements obligating parties to transact an asset at a predetermined price on a specified future date; these instruments facilitate price discovery and risk transfer, extending beyond traditional commodities to encompass digital assets and complex financial indices.
Basis
Foundation ⎊ The basis, within cryptocurrency derivatives, represents the differential between the spot price of an underlying asset and the price of its corresponding futures contract.
Contango
Condition ⎊ Contango describes a derivatives market state where the futures price for an asset is trading at a premium relative to the current spot price, suggesting that the market anticipates higher prices in the future or that the cost of funding and storage is positive.