What is Roll Yield?
Roll yield is the profit or loss that occurs when a futures position is rolled from an expiring contract to a later-dated contract. Since futures prices at different expirations vary, rolling involves selling one contract and buying another at a potentially different price. This price difference generates roll yield, which can be positive or negative depending on market structure.
Roll Yield Mechanics
When a futures position approaches expiration, traders typically roll by closing the expiring position and opening a new position in a later contract. The price difference between contracts determines roll yield.
Example: If you are long the March BTC future at $50,000 and roll to June trading at $51,000, you pay a $1,000 premium, creating negative roll yield. If June were trading at $49,000, you would gain $1,000 from rolling, creating positive roll yield.
Roll Yield and Market Structure
Roll yield is directly tied to whether the market is in contango or backwardation. In contango markets, later contracts are more expensive. Rolling longs from cheaper expiring contracts to pricier later contracts creates negative roll yield.
In backwardated markets, the relationship reverses. Later contracts are cheaper, so rolling longs generates positive roll yield.
Impact on Returns
For traders maintaining perpetual exposure through futures, roll yield significantly impacts total returns. In a sustained contango, continually paying the premium to roll can substantially erode returns.
Roll Yield Strategies
Some strategies deliberately capture roll yield. In contango markets, being short the front-month and long the back-month captures roll yield as the front converges to spot.
Perpetual Futures and Roll Yield
Perpetual futures do not have explicit roll yield since they never expire. However, the funding rate mechanism serves a similar function.