Commodity Futures Carry: Trading Backwardation and Contango

Summary

This document explains a cross-sectional commodity carry strategy that ranks futures by roll returns, buys the strongest contracts, and shorts the weakest. Its simple monthly example equally weights the top and bottom quintiles and holds the positions for one month. The rationale links futures curve shape to hedging demand and the compensation speculators may receive for taking the other side of hedgers’ risk. The document also describes evidence from research on term structure and combined momentum-and-carry strategies, including reported abnormal returns and diversification potential.

The evidence is presented as summaries of cited studies rather than a reproducible test, and the page does not give full data, implementation, or cost assumptions for its simple rule. Its explanations of carry’s source differ: it discusses hedging pressure while also citing research that emphasizes inventories and convenience yield. Carry can also perform poorly when global equity volatility rises, so the strategy should not be treated as a reliable equity hedge. Reported results are historical findings, not guarantees.

Key ideas

• A monthly cross-sectional rule buys the commodity futures with the highest roll returns and shorts those with the lowest.
• The example equally weights the top and bottom quintiles and holds positions for one month.
• Backwardation and contango are presented as signals related to futures carry and potential risk premiums.
• Research summarized on the page reports that combining term structure with momentum can improve on either signal alone.
• Commodity carry may lose value when global equity volatility rises, limiting its use as an equity hedge.

Tags

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.