Like Mav said, gotta get market specific. VIX contracts behave very differently than OJ or ES, etc...
This might be a dumb question but if I'm entering a butterfly position where I'm long the front month, short the body/first back month and long the month further back, and the market is in contango, am I long contango? Butterfly ratio is +1:-2:+1 And the market is natural gas which I think is in contango right now.
Depends on the months. FG is flat, GH and HJ are backwardated right now. Natty is highly seasonal so it switches between contango and backwardation.
The two links GAT posted are great but I thought I'd post a more "ET friendly " article: http://www.futuresmag.com/2013/01/31/how-leverage-market-contango-and-backwardation?page=5
Generally speaking with respect to physically fungible forward (futures) commodity contracts, the prompt months are driven by spec order flows and to some extent commercial use demand considerations, the rest of the curve is almost exclusively driven by commercial supply considerations. Mav is right to say that these commercial demand vs supply expectations are entirely unique to the underlying commodity name and contract delivery specs. Contango and Backwardation are traditional energy market curve descriptions, and I think the point Mav is making is that generalities across different market spaces can be dangerous. Fundamentals drive price action, and therein lies the common retail speculator's salvation. Works for me, YMMV.
Mav - when you say, for example, that GH is backwardated right now what do you mean? As GH is a spread it therefore has multiple legs so does saying that GH is backwardated mean that a) both G and H are in backwardation b) one of them is or c) something else? It just, at least to me, doesn't make intuitive sense to refer to a spread as in backwardation or contango. Thanks
Contango and backwardation always refer to the spread between two contracts. If the near month contract is below the far month, it's in contango. If the near month is above the far month, it's backwardated.