Introduction to Contango and Backwardation
Contango and backwardation describe the relationship between a futures price and the current spot price, which can help explain the cost of carry and supply-and-demand conditions; this price structure alone cannot predict future price movements.
Two Price Structures
Using the current spot price as the benchmark for comparison, a futures price higher than the spot price is called a futures premium, while a futures price lower than the spot price is called a spot premium. For example, when the spot price is 50000 USD、3-month futures are 55000 USD, the former applies; when the futures price is 45000 USD, the latter applies. Do not confuse the current spot price with a forecast of the spot price at expiration.
Why Price Structures Form
Contango may be associated with storage, transportation, financing rates, and expectations of price increases; backwardation may result from increased immediate demand, supply shortages, or short-term risks. Cost structures vary greatly across assets; for example, storage and transportation costs are generally more prominent for physical commodities than for digital assets.
How to Understand Their Practical Uses
These structures can be used to observe market conditions and support hedging or spread analysis. For example, producers and consumers can use futures contracts to lock in future prices; spread trading also requires consideration of delivery, financing, storage, and commissions. Contango or backwardation alone does not guarantee that prices will move in a particular direction.
Original Tutorial
https://www.binance.com/zh-CN/academy/glossary/contango-and-backwardation
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