Roll yield

Jana compares Bitcoin’s chart with a fund that holds futures rather than coins. A futures contract has a future expiry date, and its price can differ from Bitcoin’s price for immediate trading, known as spot. That difference is called the basis. As it changes during the holding period, futures performance can diverge from spot. Roll yield helps describe this part of the result. For a fair comparison, Jana needs the same currency, period and underlying asset, and must know the size of the position represented by each chart. Keeping a fixed number of units is different from continually maintaining the same monetary exposure. Nor can the entire gap between a fund and Bitcoin be attributed to this one component: costs and income from the fund’s other assets also affect performance. [1]

Take our simplified example of one unit of an asset, not an actual Bitcoin contract. Jana opens a long futures position at 105 USD while spot is 100 USD. By expiry, spot is still 100 USD and the futures price has fallen to that same settlement price. She loses 5 USD even though the asset’s price did not change and she never replaced the contract. Futures moved closer to spot, a process called convergence. The loss is about 4.76% of the initial notional, the contract value of 105 USD. It is not a percentage of the money deposited as margin, the collateral securing the position. This example assumes a linear dollar payoff and no costs; actual settlement follows the contract’s specified reference, not an arbitrary exchange price. [1]

A futures contract has a finite life. To stay in the market, Jana closes the expiring position and opens another with a later expiry. This is rolling. Suppose she closes the old contract at 100 USD and opens the new one at 105 USD. That 5 USD difference is not automatically a cash loss: she is comparing two different contracts. The old position’s result depends on its original entry price, while the new one starts accumulating gains or losses from 105 USD. She does not pay the new futures notional as a purchase price for coins, but must provide the required margin. Trading fees and slippage, the difference between an expected execution price and the price achieved, are real costs. The gap between contract prices is a different matter. [1]

Jana wants to maintain a notional exposure of 10,500 USD. In our abstract model, each unit has a multiplier of 1: a dollar price move changes its profit or loss by a dollar. At a price of 100 USD, that exposure requires 105 units; at 105 USD, it requires only 100 units. Keeping 105 units would give her a notional of 11,025 USD and therefore a larger position. A reduction in units while preserving notional does not itself mean an immediate loss. This is why a fixed-contract-count chart cannot be compared without adjustment with an index using a different exposure rule. Real trading must respect the exchange contract’s multiplier and permitted quantities; these small numbers are not a contract specification. [1] [2]

When futures trade above spot, the market is in Contango. For a long position, which benefits from rising prices, the gradual disappearance of that premium can contribute negatively to returns. The whole trade can still turn out differently. In another example of our own, Jana opens a unit at 105 USD with spot at 100 USD, then closes it at 115 USD: a gain of 10 USD before costs. Conversely, a unit opened at 95 USD below spot, in Backwardation, can fall to 90 USD and lose 5 USD. Starting prices do not fix future prices. A favourable roll yield is therefore no promise of profit, and an unfavourable one does not by itself predict a loss for the entire portfolio. [1]

S&P futures indices use the labels excess return and total return. The former tracks gains and losses from the held futures’ price changes under the index rules. The latter adds a methodology-defined return on cash collateral, the funds set aside to back positions. Even excess return is not pure roll yield: it also includes the market’s own movement. And the additional return in a total return index is not automatically interest credited to Jana’s account. A fund or broker may handle cash differently; management fees, financing and trading costs also affect the final result. A comparison therefore needs to identify what each series actually measures. [2]

There is no universal roll day for every fund. The S&P Bitcoin Futures Daily Roll Index shifts its exposure between the nearest and next contract daily. The regular cryptocurrency futures indices under S&P’s methodology use a five-business-day window each month. A weight describes how much of the tracked position is assigned to a particular contract. Different calendars can therefore produce different contract mixes on days when prices move sharply. Jana needs to identify the specific index, its weights and the applicable methodology. The words “Bitcoin futures” alone do not mean two products will deliver the same result. [2] [3]

A price chart brings another trap. If a data provider joins the expiring contract’s price to the next contract’s price, a jump can appear even though nobody earned that jump as a profit. A back-adjusted chart smooths it out by changing earlier values. Such a series can help with analysis, but it is no longer the price history of one actual contract. Jana’s result depends on the contracts she held, their quantities or weights, entry and exit prices, and costs. Once she has calculated the actual positions’ price changes, she must not add or subtract the contract-switch price gap a second time. Roll yield helps explain performance; it is not another fee on the account statement. [1] [2]