Which of the following best defines roll return in commodities?

Roll return in commodities refers to the gains or losses that investors experience as they roll over futures contracts. When a futures contract approaches its expiration date, investors often close their position and open a new one with a later expiration date. This process is known as "rolling" the contract.

The return from this rollover can be impacted by the shape of the futures curve. If the market is in a backwardation state (where shorter-term futures contracts are priced higher than longer-term ones), rolling from a front-month contract to a back-month contract could lead to a gain, as the investor sells short at a higher price and buys long at a lower price. Conversely, if the market is in contango (where longer-term contracts are priced higher than shorter-term ones), rolling could result in a loss because the investor sells short at a lower price and buys long at a higher price.

Therefore, the concept of roll return highlights the effects that futures market dynamics have on total returns from commodity investments. This understanding is crucial for investors who manage futures contracts and are looking to optimize their returns based on market conditions.