Carryovertradingin

Carryover trading, also known as contango, describes a market condition where futures contracts with longer maturities are trading at higher prices than those with shorter maturities. This upward sloping futures curve suggests that the market expects the price of the underlying asset to increase over time. This premium for longer-dated futures typically reflects the costs associated with holding the asset until its delivery date, such as storage, insurance, and interest costs. Investors in such a market might engage in carryover trading by buying a shorter-dated futures contract and selling a longer-dated contract, aiming to profit from the difference in prices as the shorter-dated contract approaches expiry. Conversely, backwardation, the opposite of contango, occurs when futures contracts with shorter maturities are priced higher than those with longer maturities, indicating an expectation of price declines. Understanding carryover trading is crucial for futures market participants as it influences pricing strategies and hedging decisions.