Positive or Negative Carry Roll Trade

[td]

Is there a simple rule for determining whether a roll trade would have positive or negative carry? For example, does a "normal contago" market result automatically result in a negative carry.

 

[ShaktiRathore]

Hi
See the mettalgesellschaft case it illustrates when short roll over positions are taken in oil futures during contango negative roll/losses during roll over resulted which caused huge margin calls and subsequent bankruptcy,when in fact expectation of conpany was of backwardation which would have resulted in positive roll.
Rule can be:
1)Long position roll over: Contango leds to gains(positive carry) while backwardation leds to losses(negative carry).
2)Short position roll over: Contango leds to losses(negative carry) whle backwardation leds to gains( mettalgesellschaft case).
Thanks

 

[Mikhail Shkolnik]

1)Long position roll over: Contango leds to gains(positive carry) while backwardation leds to losses(negative carry).
2)Short position roll over: Contango leds to losses(negative carry) whle backwardation leds to gains( mettalgesellschaft case).
Thanks

Isn't it the other way around?
A long futures position loses on the roll return in a contango and gains on roll return in backwardation.
A short futures position profits on the roll return in a contango and loses on roll return in backwardation.

 

[David Harper CFA FRM]

Hi @Mikhail Shkolnik This was a rare misstatement by Shakti . You are correct. Backwardation implies F(2) < F(1) < F(x) < S(0) such that a long position is buying at a lower futures price and selling at a higher spot price with a positive roll return. In the case of MG, they hedged long-term short forward contracts with short-term long futures contracts. The oil market was historically in backwardation such that they relied on the profitable roll returns earned for their long futures positions under backwardation; but the market unexpectedy shifted to contango which created losses on the roll return. Thanks1,