 Welcome back. In this lesson, I want to teach you about contango and backwardation and how that's relevant to trading futures and options on futures. So this is a subject that's a little bit confusing for newer traders, but hopefully I can simplify it and make it make sense for you. So let's first go over the definition. So what is contango? Contango refers to when the price of the further expiration futures are higher than the price of the near term expiration futures. Most futures are typically in contango, meaning that the price of the futures in further dated expirations, the price is higher than that of the near term. The opposite of that is backwardation and that's when the price of the further expiration futures is lower than the price of the near term expiration futures. And I put a little note here. Most futures are usually in contango, but futures may go into backwardation typically when volatility spikes higher. It can happen other times, but what you'll find in most futures, most futures are in contango about 85% of the time. So let's go to the platform and take a look at this and make sure it makes sense to you. So let's take a look at oil, for example, forward slash CL. And if we're on the trade tab in Thinkorswim, you can see all the different futures that are available with the different expiration cycles. So this is the active one with seven days left, and the price of oil right now is $48.70. Well, if you look at the one with 37 days to expiration, it's $49.20. And then with 68 days to expiration, it's a little bit higher. It's $49.52. And then 49.77 and then 50. So you can see that the price of the future, the further out you go, the higher the price is. So if you said, you know what, I think oil is really low right now, I'm just gonna buy oil and hold it for the next year. Well, here's why that is not as easy of a trade as you might initially think. And that is because you're not just buying it at 48.78. The furthest these futures go out is 131 days. Instead of buying it at $48.77, you're actually gonna be buying it essentially for 50. Now you would always want to stay in the active month. The longer you're in the trade, you're incurring that cost of carry. And so there, you know, just remember, there are no free lunches. You'll notice it even more if you take a look at a futures contract like the VIX. This is kind of a trap that a lot of newer traders fall into. They look at the spot VIX, which is just ticker VIX. And if you look at a long-term chart, you can see, okay, for example, now at the time of this recording, the VIX is at $10.53. Well, look over time, that's a relatively low reading compared to a lot of time. So why wouldn't you just buy VIX and let it go up, like wait for it to go up? Well, here's why is because A, you cannot just buy shares of the VIX. It's an index, right? You can't just buy shares of an index. You have to use the underlying ETF or the futures. Well, if you buy the future, take a look at the cost of carry and the way that these work. So you can see right now the VIX future is trading at $11.70, even though the VIX spot price is $10.53. And if you were to hold it long-term, even just going out 28 days, you could see the VIX futures are trading at $13.40. So almost a full $2 higher than what you're seeing right now. So that's why you can't just buy these and hold them for long-term because you've got that cost to carry. You've got that drag built in because they are priced differently over time. So going back to the definitions, you want to make sure that if you are buying futures outright or selling them outright, you understand whether that future is in a period of contango or backwardation. And it doesn't necessarily affect the options as much until you get to rolling those options on the futures. So this is really just to describe the situation on the underlying futures contract. So hopefully that makes sense. It doesn't come into play a lot for the type of trading that we do. However, I wanted to give you this information to make sure that you understand the difference between contango and backwardation and how that affects the price of the underlying futures contract. Hope that was helpful. We will see you in the next lesson.