Terms

Backwardation

Backwardation

Backwardation is when the current price of an underlying asset is higher than prices trading in the futures market. It can occur as a result of a higher demand for an asset currently than the contracts maturing in the coming months through the futures market. Traders use backwardation to make a profit by selling short at the current price and buy at the lower futures price.

More About Backwardation

Pros

  • Backwardation can be beneficial to speculators and short-term traders wishing to gain from arbitrage.
  • Backwardation can be used as a leading indicator signaling that spot prices will fall in the future.


Cons

  • Investors can lose money from backwardation if futures prices continue to move lower.
  • Trading backwardation due to a commodity shortage can lead to losses if new suppliers come online to boost production.