So i understand what backwardation is…ever lower forward prices, and I understand that people earn a positive roll return.
And I see the book definition , somewhat paraphrased is “a positive return will be earned from a simple buy and hold strategy. The positive return is earned because as the futures contract moves closer to maturity, its price must converge to spot”
How is this structured? If you are long the contract, you are obligated to buy the commodity in the future. What happens then? You buy it and then sell it spot for a higher price, then reinvest in a lower contract and sell it at spot in the future, then repeat?
Intuitively, to me, it seems that since there are lower futures contract prices, it would converge to spot, ever lower so one would continue to have lower valued futures and spot prices losing money. In other words I buy at a dollar today and its worth .98 in the future, repeat…it doesn’t seem like a moeny maker.
I know this is a fairly basic topic, but I just can’t make intuitive sense of it and Im missing something, I know. Its seems like I knew this at level 2 and just forgot.