How commodity futures work: expiry, rollover, contango and roll yield

A commodity futures contract is a standardised agreement, traded on an exchange, to buy or sell a fixed quantity of a commodity at a price agreed today for delivery or cash settlement on a set future date. Because each contract has an expiry, a trader who wants exposure for longer has to roll from one contract to the next, and the price gap between contract months (contango or backwardation) becomes a cost or benefit of holding. Most commodity CFDs offered to retail traders are priced from these futures, so the same mechanics show up in CFD prices, rollovers and charges.

Why futures exist

Futures grew out of a practical problem. A farmer planting wheat in spring does not know what the crop will sell for at harvest; a miller who will need that wheat does not know what it will cost. A forward agreement, fixing the price today for delivery later, removes that uncertainty for both. Exchanges standardised these agreements, so that every contract for a given commodity and month is identical and can be traded with anyone, and introduced a clearing house to stand between buyers and sellers.

Today futures markets serve two broad groups:

• Hedgers: producers, consumers and merchants of the commodity, such as oil producers, airlines, miners, food companies and utilities, who use futures to reduce price risk in their business.
• Speculators: traders and funds who take on price risk in the hope of a return. They provide liquidity, making it easier for hedgers to find the other side of a trade.

Futures also do a public job: price discovery. The futures price for a benchmark like WTI crude or COMEX gold is the reference price used in news reports, physical contracts and, crucially for retail traders, most commodity CFDs.

The anatomy of a futures contract

Every futures contract specification sets out the same core items. Taking widely traded examples:

• Underlying and quality: the exact commodity and grade, for example light sweet crude oil, or gold of a specified minimum fineness.
• Contract size: WTI and Brent crude futures are 1,000 barrels each; the standard COMEX gold contract is 100 troy ounces. Smaller "mini" and "micro" versions exist for some markets.
• Price quotation and tick size: the minimum price move and its value per contract.
• Contract months: which months are listed. Crude oil has a contract for every month; many agricultural contracts list only certain months that fit the crop cycle.
• Last trading day: when trading in that month stops.
• Settlement method: physical delivery (for example, WTI at Cushing, Oklahoma) or cash settlement against an index (for example, Brent).
• Trading hours: many energy and metals contracts trade electronically almost 24 hours a day on weekdays, with a short daily break.

Check the exchange's specification page for the exact terms; they do change from time to time.

Margin and daily settlement

Futures are traded on margin, but the system differs from the margin you may know from leverage and margin on CFDs.

1. Initial margin: to open a position, you post a deposit set by the clearing house (brokers may require more). It is typically a modest percentage of the contract's value, and it changes with volatility.
2. Mark to market: at the end of every trading day, the exchange sets a settlement price. Each open position is revalued, and the day's gain or loss is paid into or out of the account in cash.
3. Maintenance margin: if losses push the account below a maintenance level, the trader receives a margin call and must top up to the initial level, or the position is closed.

The clearing house is the counterparty to every trade, which largely removes the risk that the person on the other side fails to pay. Daily settlement means losses cannot quietly accumulate until expiry; they are crystallised in cash each day.

Worked example: daily settlement

Illustrative numbers only. A trader buys one crude oil futures contract (1,000 barrels) at $70.00. Assume initial margin of $6,000 and maintenance margin of $5,500.

• Day 1: settlement price $69.20. Loss = 0.80 × 1,000 = $800. Account falls from $6,000 to $5,200, which is below $5,500, so the trader receives a margin call to restore it to $6,000 (pay in $800).
• Day 2: settlement price $70.50. Gain = 1.30 × 1,000 = $1,300, credited in cash. Account $7,300.
• Day 3: trader sells at $70.10. Final day's loss = 0.40 × 1,000 = $400. Account $6,900.

Overall: bought at $70.00, sold at $70.10, a $100 gain, which matches the sum of the daily settlements (−$800 + $1,300 − $400 = $100), before commissions and fees. The path mattered, though: on day 1 the trader had to find more cash, and a trader without it would have been closed out at a loss.

Expiry, delivery and why most traders never see a barrel

Physically settled contracts require delivery if held to expiry. A holder of a long WTI contract at expiry is obliged to take 1,000 barrels at Cushing; a short holder must deliver them. Speculators and most hedgers have no wish to do that, so they close or roll positions before the last trading day, and many brokers will not allow retail clients to hold physically settled contracts into the delivery period at all.

The approach of expiry has practical consequences:

• Trading activity and liquidity migrate from the expiring contract (the "front month") to the next one in the days before expiry.
• The expiring contract can behave erratically as remaining holders scramble to exit. The most extreme case was 20 April 2020, when the May WTI contract settled at about minus $37.63 a barrel the day before it expired, because storage was nearly full and holders could not take delivery. The full story is in oil trading explained.
• Charts that join consecutive contracts (continuous charts) show jumps at each switch unless they are back-adjusted, which can create false signals in technical analysis.

The futures curve: contango and backwardation

At any moment, each contract month has its own price. Plot those prices against expiry date and you get the futures curve, sometimes called the term structure.

Contango

In contango, later months trade above nearer months. The textbook reason is the cost of carry: someone who buys the commodity today and stores it for delivery later pays for storage, insurance and the interest cost of the money tied up, so a later delivery price should be higher to compensate. Contango is common in markets with ample supply and available storage. For gold, which is cheap to store relative to its value, the curve is usually in mild contango reflecting mostly interest rates.

Backwardation

In backwardation, nearer months trade above later months. This tends to happen when a commodity is scarce now: users pay a premium for immediate supply, and owners of inventory benefit from holding it (sometimes called the convenience yield). Energy and agricultural markets move in and out of backwardation as supply conditions change.

Spot, futures and the basis

The difference between a spot (cash) price and a futures price is called the basis. As a futures contract approaches expiry, its price tends to converge on the spot price, because at expiry both describe the same thing: the commodity available now. Convergence is why the front-month contract is the usual "headline" price.

Roll yield: the return nobody sees on the chart

Roll yield is the gain or loss from moving a position from an expiring contract to a later one. It is the reason a long-term futures position can perform very differently from the headline price.

Worked example: rolling in contango

Illustrative numbers only. A trader wants to stay long one contract for three months. Each month the front contract converges to a flat spot price of $70, and the next contract always trades $1 higher (steady contango).

1. Buys the next month at $71. Over the month it converges to $70: loss $1 per barrel.
2. Rolls: sells the expiring contract at $70, buys the next one at $71.
3. Over the next month it converges to $70 again: another $1 loss.

After three rolls, the trader has lost about $3 a barrel, or $3,000 on a 1,000-barrel contract, even though the spot price stayed at $70 the whole time. In backwardation with the same numbers reversed, the trader would have gained about $3 a barrel. In reality the curve shape keeps changing, the spot price moves, and roll yield is mixed with price changes, but the principle holds: the curve is part of the cost of a long-term futures position.

This is also why commodity exchange-traded products that hold futures can drift away from the spot price over time. The ETFs explained guide discusses this.

How CFD providers price commodity CFDs

Most retail traders in Europe get commodity exposure through CFDs rather than exchange futures. A CFD is an agreement with the provider to exchange the difference in price between opening and closing; it is not traded on an exchange. Providers generally price commodity CFDs from the futures market and offer two designs.

Futures-based (dated) CFDs

• The CFD tracks a specific futures contract month, and its price is that contract's price plus the provider's spread.
• It has an expiry date, usually a little before the futures contract's last trading day.
• Because the futures price already includes the cost of carry, there is usually no daily financing charge, although spreads may be wider.
• At expiry, the position is closed at the final price. Some providers offer to roll it into the next contract automatically, sometimes with a charge.

Rolling (undated or "cash") CFDs

• The price is derived from a futures contract (or a blend of the two nearest), but the CFD has no expiry from your point of view.
• A daily financing charge applies to positions held overnight, as described in swap and overnight financing.
• When the provider switches its reference to the next contract month, the quoted price jumps by the difference between the contracts. The provider applies a roll adjustment to your account to neutralise that jump, so the switch itself does not create a gain or loss. Some providers charge a fee or half-spread at the roll.

Worked example: a rolling CFD adjustment

Illustrative numbers only. You are short 50 units of a rolling gold CFD (1 unit = 1 troy ounce) referenced to the December contract at $2,000.00. The provider rolls to February, which is trading at $2,016.00 (contango).

• The quoted CFD price rises by $16.00 at the roll.
• Without an adjustment, your short would show a loss of 16 × 50 = $800 from nothing more than the change of reference contract.
• The provider credits you a roll adjustment of $800, so your position's value is unchanged. A long holder of the same size would be debited $800.

So in contango the roll adjustment debits longs and credits shorts; in backwardation it is the reverse. Over many months these adjustments and the daily financing together are the real cost of holding. Providers publish roll dates and their method; if you plan to hold through a roll, read them first. The guide to CFDs on stocks, indices and commodities compares this with index and share CFDs.

Leverage limits on commodity CFDs

Under ESMA rules in the EU (and the equivalent FCA rules in the UK), retail clients face maximum leverage of 20:1 on gold and 10:1 on other commodities, with a 50% margin close-out rule and negative balance protection. See ESMA leverage limits and negative balance protection. You can estimate margin with the margin calculator and work out profit or loss with the profit and loss calculator.

Futures versus CFDs at a glance

• Venue: futures trade on regulated exchanges with a central clearing house; CFDs are over-the-counter contracts with the provider as counterparty.
• Size: futures come in fixed contract sizes, often large; CFDs can usually be traded in smaller fractions.
• Margin: futures margin is set by the clearing house and broker and settled daily in cash; CFD margin follows the regulatory caps and the provider's terms.
• Costs: futures have commissions and exchange fees, with carry built into the price; CFDs have spreads, possibly commissions, and either financing (rolling) or carry in the price (dated).
• Expiry: futures always expire; dated CFDs expire; rolling CFDs are adjusted at each roll.
• Protections: retail CFD accounts in the EU benefit from negative balance protection; futures accounts generally do not, so losses can exceed the deposit.

Common mistakes

• Not knowing the expiry date. Every futures contract and dated CFD has one. Check it before opening.
• Comparing a long-term position with a spot chart. Roll yield, financing and adjustments mean your result can differ markedly from the change in the headline price.
• Misreading continuous charts. Unadjusted continuous charts show artificial gaps at each roll.
• Underestimating contract size. One standard futures contract can represent tens of thousands of dollars of commodity. Work out the value of a one-unit move first; the position size calculator helps.
• Ignoring liquidity near expiry. The expiring month can thin out and behave unusually.
• Assuming futures cannot go negative. April 2020 proved they can, at least for a physically delivered contract under extreme storage conditions.

Leveraged commodity trading is high risk: most retail CFD accounts lose money, and the risk warning explains the main dangers.

Frequently asked questions

What happens if I hold a futures contract to expiry?

For a physically settled contract, you are obliged to make or take delivery of the commodity; for a cash-settled contract, the position is closed against a final settlement price. Most brokers require retail clients to close or roll physically settled positions before the delivery period begins.

What is the difference between contango and backwardation?

In contango, later-dated futures trade above near-dated ones, often reflecting storage and financing costs. In backwardation, near-dated futures trade above later ones, often reflecting tight current supply. The shape can change from one to the other as market conditions change.

What is roll yield?

Roll yield is the gain or loss from closing an expiring futures contract and opening a later one. In contango a long position tends to lose at each roll, because it sells the cheaper contract and buys the dearer one; in backwardation it tends to gain.

Do commodity CFDs have expiry dates?

Futures-based CFDs do, and they usually expire shortly before the underlying futures contract. Rolling CFDs do not expire for the client, but the provider adjusts positions each time it moves to a new reference contract and charges daily financing.

Why does my commodity CFD price jump at the roll?

Because the provider has switched to a different futures month with a different price. A roll adjustment is applied to your account to offset that jump, so the switch alone should not change your position's value, apart from any roll charge.

Can I lose more than my deposit trading futures?

Yes. Futures accounts generally do not carry negative balance protection, so a large adverse move can leave you owing money to your broker. Retail CFD accounts with EU-regulated providers have negative balance protection, which limits losses to the account balance.