How does roll yield work and when is it positive versus negative?

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AcadiFi · Accepted Answer

Roll yield is the return component a futures investor earns (or loses) from closing an expiring contract and reopening the position in the next contract along the curve...

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Positive roll yield occurs in backwardation. If spot WTI is $82 and the one-month forward is $79, a long investor rolling monthly sells the expiring contract near $82 and buys the next contract at $79, capturing $3/barrel implicitly each month (assuming spot stays flat). Annualized, this is roughly 43% of roll yield, though realized returns depend on spot convergence.

Negative roll yield occurs in contango. If spot natural gas is $2.80 and the one-month forward is $3.10, a long investor loses $0.30/MMBtu per roll — the curve structure itself generates losses even when the underlying commodity's spot price is unchanged.

Formula for approximate roll yield: RY = (S - F) / F * (12/months_to_expiry) for monthly rolls.

```mermaid
flowchart LR
  A[Sell Near Contract] --> B{Curve?}
  B -->|Backwardation| C[Buy Cheaper Deferred]
  B -->|Contango| D[Buy Pricier Deferred]
  C --> E[Positive Roll]
  D --> F[Negative Roll]
```

For short positions, the signs reverse: contango benefits shorts, backwardation hurts them. Commodity index funds like the S&P GSCI optimize roll strategies by rolling into less-contangoed parts of the curve (enhanced indices) or by using optimized-roll structures that skip months where curve slopes are unfavorable. For FRM exam purposes, always identify the sign from the curve shape first, then multiply by the investor's long/short direction.

How does roll yield work and when is it positive versus negative?

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