What Is the Concept of “Contango” and “Backwardation” in Futures Markets?

Contango occurs when the futures price is trading above the expected spot price at expiration, resulting in a positive basis. This is typical in markets where there is a cost to carry the asset.

Backwardation occurs when the futures price is trading below the expected spot price, resulting in a negative basis. Backwardation is less common and often indicates a scarcity or high immediate demand for the underlying asset.