Comparing Basis Trade Returns Across Futures Maturities

Summary

The document frames a cash-and-carry trade in a contango market: buy the underlying asset and sell a futures contract. It compares a nearer contract with a higher annualized yield against a later contract that may offer a larger absolute basis. The trader also considers exiting early if volatility pushes the basis into backwardation, so the comparison involves both maturity and a possible change in exit timing.

The post poses an optimization question but provides no answer, calculation, or historical evidence. It does not specify funding costs, transaction costs, margin use, reinvestment assumptions, or the likelihood and timing of basis changes. Those omissions mean the relative return cannot be determined from the stated yields alone. The useful takeaway is the decision framing: assess total return over the actual holding period and account for the possibility of an early exit, rather than comparing annualized yields in isolation.

Key ideas

• A cash-and-carry position in contango buys spot and shorts a futures contract.
• A higher annualized yield on a shorter contract does not by itself settle which maturity offers a better return.
• An early exit after the basis moves toward backwardation changes the realized holding period and payoff.
• The document raises the comparison but supplies no model or evidence to resolve it.

Tags

# yield versus duration in cash-and-carry (basis) trade


# yield versus duration in cash-and-carry (basis) trade












I am trying to run a cash-and-carry (basis) trade. I'm having trouble understanding how to weigh the tradeoffs between yield, annualized yield and duration/time to expiry.

Suppose we are in a contango situation so I am looking to buy spot and short the futures of this asset. There is a contract expiring in 3 months and one expiring in 6 months. The 3 months contract has a higher annualized yield but obviously expires sooner. The volatility is high so there is a chance that both contracts could go into backwardation prior to expiry and which point I would exit the position to realize the gains earlier.

I'm not sure how to approach the math on how to determine which position has a better return profile. Higher annualized yield for shorter period or larger absolute basis? Can anyone give me any pointers as to how to look at this optimization problem?

Thanks alot!

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