> For the complete documentation index, see [llms.txt](https://guide.laevitas.ch/llms.txt). Markdown versions of documentation pages are available by appending `.md` to page URLs; this page is available as [Markdown](https://guide.laevitas.ch/concepts/backwardation.md).

# Backwardation

{% hint style="info" %}
A market in backwardation occurs when the forward price of the futures contract is lower than the spot price (negative basis). \
This generates a downward sloping forward, or inverted, curve which is in backwardation. \
Volatility in backwardation is a signal that investors expect more volatility in the near-term.
{% endhint %}

### Original Definition of Backwardation

The precise definition is not just an inverted curve, but it is actually the theory of normal backwardation. 

The definition came from economist John Maynard Keynes through his book *In Treatise on Money* (1930, chapter 29).  

"Normal backwardation" occurs when the sellers are willing to sell in the future at a discount to the expected price because of the volatility, so that they could lock in their price.

### **Negative Basis**

When backwardation occurs, there is negative basis whereby the futures price is lower than the current spot price.

Basis is the difference between the futures price and the spot price of the same asset. Basis can be calculated to the near future, and may represent different time periods. The below calculation expresses basis as a nominal value:\
\
Basis (B) = Future Price (F) - Spot Price (S)

### What Does Backwardation Points To ?

When the basis turns negative (backwardation), this is an alarming, bearish red flag in the market.

In contrast, a 5%–15% annualized premium is expected in healthy markets, a situation which is known as Contango. 

\
Read more about Contango here.