Editor's Note: Options are not suitable for all investors. Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Please see the Characteristics and Risks of Standardized Options.
Table of Contents
Cost of carry refers to the ongoing expenses tied to holding an investment, such as interest payments, storage fees, or missed potential gains from using the money elsewhere. These costs may impact the total return that an investor earns on a position. These costs can vary by asset type and financing method, but they often influence pricing and profit potential.
This guide breaks down how cost of carry works in futures and options trading, how to calculate it, and why it matters when assessing potential returns.
Key Points
• Cost of carry refers to the ongoing costs associated with holding an investment, such as interest, storage, or insurance.
• These carrying costs can reduce the net return of an investment if not properly accounted for.
• In options trading, cost of carry may include margin interest, opportunity costs, and missed dividends.
• The cost of carry in futures helps explain the difference between spot and futures prices.
• Cash-and-carry arbitrage strategies attempt to profit when futures prices exceed spot price plus carrying costs.
What Is Cost of Carry?
Cost of carry refers to the ongoing expenses associated with holding a given investment. Transaction costs, which are incurred upon the purchase or sale of the asset, are typically not considered a carrying cost.
Cost of carry can come in a variety of different forms — here are a few types of carrying costs that you’ll want to be aware of:
• Storage costs, if you are investing in the futures market for physical goods
• Interest paid on loans used for an investment
• Interest charged in margin accounts when borrowing to invest in stocks or options
• Costs to insure or transport physical goods
• The opportunity cost of investments
Most, if not all, investments have carrying costs, and many buyers factor these into their decisions. Even if a particular investment doesn’t have obvious carrying costs, there is always the opportunity cost of making one options trade over the other.
How Cost of Carry Works
The way that cost of carry works depends on the type of investment you are considering. If you are investing in the futures markets for tangible goods like coffee, oil, gold, or wheat, you may incur carrying costs related to storage, insurance, or delivery. For example, if you buy a commodity like crude oil, you must pay the costs for transporting, insuring and storing that oil until you sell it.
To accurately calculate net trading returns, you must include those carrying costs.
In a purely financial transaction like buying stock or trading options, there can still be carrying costs involved. You may have to pay interest if you are borrowing money with a margin account. You may also incur what are called opportunity costs. Opportunity costs refer to potential unrealized returns.
If you are holding $10,000 in your stock account waiting for an option assignment, you may be forgoing potential returns on other potential investments.
Which Markets Are Impacted by Cost of Carry?
Cost of carry is a factor in a variety of different types of investments. Options trading has carrying costs, including interest incurred through margin accounts and opportunity costs associated with capital allocation.
Investing in commodities may require a cost of storing, insuring, or transporting your goods. You should be aware that most types of investments also have opportunity costs.
Cost-of-Carry Calculation
The simplest cost-of-carry calculation just includes all of your carrying costs as a factor when you analyze the profitability of a particular investment. So, if
• P = Purchase price of an investment
• S = Sale price of the same investment
• C = carrying costs while holding the investment
The net return of this investment could be expressed as Profit = S – P – C. This formula highlights how holding costs directly influence potential gains.
Futures Cost of Carry
The futures market has two different prices for each type of commodity. The spot price refers to the price for immediate delivery (i.e., on the spot). A futures price is the price for goods at some specified time in the future.
Because most futures contracts incur carrying costs, the futures price is usually (but not always) higher than the spot price. This situation is called contango. When the futures price is lower than the spot price, often due to high demand or limited supply, it’s known as backwardation. (Contago and backwardation are key terms in commodity futures markets.)
Options Cost of Carry
When trading options the costs of carry fall into a few categories:
• Interest costs – Some investors borrow money to purchase options, i.e., a loan from a friend, a bank loan, or a brokerage margin account.
Whatever the source of the money, the interest paid on borrowed funds is a carrying cost.
• Opportunity costs – You’ve chosen to invest in options. But where else could you have invested that money? Because most alternative investments carry risk, as does investing in options, it’s difficult to make an apples-to-apples comparison.
Risk-free investing rates are typically used to assess opportunity cost. “Risk-free” is often approximated using the yield on short-term U.S. Treasury bills, such as the three-month T-bil. In the past, 30-year bonds were the standard, but 10-year returns and even the return on short-term Treasury notes may also be used.
• Forgoing Dividends – One of the disadvantages of owning options compared to owning stock, is that you are not eligible for dividends as an option holder. The market may price expected dividends into the option premium but, as interest rates can fluctuate over time, so can dividend rates.
Models like Black-Scholes and binomial option pricing incorporate cost of carry through adjustments to interest rates and dividends.
💡 Quick Tip: All investments come with some degree of risk — and some are riskier than others. Before investing online, decide on your investment goals and how much risk you want to take.
Examples of Cost of Carry
Here is an example of cost of carry and how it might affect an investment in purchasing company XYZ commodity.
Say you buy a contract for 1,000 barrels of XYZ commodity at $80/barrel. Six months later, the price of the commodity has gone up to $90/unit, and you sell. At first glance, it may appear to yield a $10,000 profit, but that excludes the cost of carrying the oil.
If it cost you $3,000 to store and insure those units for the six months that you owned them, those carrying costs must be subtracted from your profit. You also are liable for delivering the commodity, which might cost another $1,000. Considering the cost to carry, your actual profit was only $6,000. While these costs may be easier to understand with physical goods like commodities, most types of investments have carrying costs.
Cash and Carry Arbitrage
Like crypto arbitrage, there sometimes exists a type of arbitrage called cash-and-carry arbitrage. In cash-and-carry arbitrage, an investor will purchase a position in a stock or commodity and simultaneously sell a futures contract for the same stock or commodity.
If the futures price is higher than the combined amount of the stock price plus carrying costs, it may be possible to achieve a limited arbitrage gain through cash and carry arbitrage. However, execution delays, financing charges, or delivery constraints may reduce or eliminate gains.
Cost of Carry and Net Return
As discussed already, the cost of carry can reduce the net return on investment. When determining your total profit and the return on investment (ROI), you need to account for any and all costs that you incur as part of the investment.
These might include transaction costs, like commissions, interest payment, and storage costs. Subtract these costs from gross profit to calculate the net return of your investment.
Can You Do Anything About Cost of Carry?
While cost of carry is difficult to eliminate entirely, investors can reduce its impact by choosing investments in line with their goals and resources. For example, if you do not have access to low-cost financing or storage, you may want to avoid trades that rely heavily on borrowed funds or physical delivery. On the other hand, if your specific situation gives you access to below-market financing or storage costs, you may be able to earn a profit with cash and carry arbitrage.
The Takeaway
The cost of carry isn’t just a theoretical concept: it directly affects net return by adding real, sometimes hidden, costs to holding an investment. Whether due to storage and insurance in futures or margin interest and missed dividends in options trading, these expenses can shift trade-related math. Understanding how carry works helps buyers assess risk, price contracts more effectively, and misjudge a position’s profit potential.
SoFi’s options trading platform offers qualified investors the flexibility to pursue income generation, manage risk, and use advanced trading strategies. Investors may buy put and call options or sell covered calls and cash-secured puts to speculate on the price movements of stocks, all through a simple, intuitive interface.
With SoFi Invest® online options trading, there are no contract fees and no commissions. Plus, SoFi offers educational support — including in-app coaching resources, real-time pricing, and other tools to help you make informed decisions, based on your tolerance for risk.
FAQ
How can you calculate cost of carry?
The cost of carry refers to any costs that you incur during the course of your investment. In commodities trading, this generally refers to costs like storage, insurance, or delivery of the commodity. In other types of investments, the cost of carry could include interest charges or the opportunity cost of using your money.
Do bonds have a cost of carry?
Yes, nearly all investments, including bonds, can involve costs associated with holding or financing the position. In the bond market, the cost of carry generally refers to the difference between the face value of the bond plus premiums minus applicable discounts.
How are ordering and carrying costs different?
Ordering costs are the costs that you pay as part of the ordering process. In a stock or option transaction, any broker’s commissions that you pay would be considered ordering costs. While ordering costs are usually incurred only once (at buy and/or sale), carrying costs are the costs that you must pay to hold an investment throughout its duration.
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