Commodity Roll Yield
Capture roll yield in backwardated commodity futures by holding front-month (or optimized roll) with vol scaling.
Thesis (edge)
When futures are in backwardation, rolling from front to next captures positive roll yield. By selecting commodities with favorable term structure and scaling by vol, we target a carry premium.
Where it works (regimes)
Works when term structure is backwardated. Fails in sustained contango (e.g. oil 2020). Regime-dependent.
Signals
- Roll yield = (front price - next price) / front price (annualized). Rank commodities; long those with positive roll. Scale by inverse vol.
Portfolio construction
Equal risk or equal weight among selected commodities. Rebalance monthly. Roll 5–10 days before expiry.
Risk model
Tail: contango shift; single-commodity crash. Diversify across sectors (energy, metals, ag). Use position limits.
Costs & implementation
Roll costs and slippage. Use liquid contracts. Avoid illiquid delivery months.
Failure modes
Chasing backwardation that flips; over-concentration; ignoring spot volatility.
Our Notes & Suggestions
Monitor term structure regularly. Combine with trend filter (e.g. only hold when trend is supportive). Backtest across 2008, 2020 for stress.
Our Notes & Suggestions
See the "Our Notes" subsection in the body above for practical guidance, gotchas, and best practices. Always validate regime assumptions and transaction cost assumptions before scaling.
Implementation Checklist
- Compute term structure (front vs next)
- Select backwardated commodities; avoid steep contango
- Vol-scale position; define roll schedule
- Backtest with realistic roll costs