A futures rollover refers to ending open positions in contracts nearing expiration to make room for those with more time. Although the lapse dates vary from one contract to another, the expiry month’s third Friday is common for most futures. You have two choices if you don’t fancy a rollover.
One of them is offsetting your position. This entails purchasing a short contract to cancel out a long contract’s position or vice versa. Alternatively, you can opt for a cash settlement or deliver the primary asset in the event of a short position.
Three dates come into play during a rollover. To begin with, the expiration date marks the contract’s final, binding day. The final date a contract is tradable, on the other hand, is its last trading day. That’s not all; the roll date represents the duration your contract shifts from being front-month to forward-month. Note that the roll date isn’t a scheduled day. Volumes are likely to shift as the rollover approaches with investors rushing to close and open positions.
When trading futures contracts, the term ‘rollover’ refers to closing the open positions in contracts that are about to expire in the interest of futures that have will expire later in future. This process is unique for every product and when performed, it makes a significant impact on market volatility and price action.
The rollover process is very important when it comes to risk management. Investors must pay close attention when trading soon-to-expire contracts due to different challenges that emerge due to split volume and lower market liquidity.
The rollover is an action of utmost importance in futures trading as it substantially affects the bottom line of the account.
Futures contracts have a limited lifetime that can affect the results of investor’s trades and exit strategies.
Futures’ expiry date is the last day you can trade the contract, usually a third Friday of the expiration month, but that’s not always the case.
Futures rollover is when an investor changes his position from the front-month contract to another contract in the future. Traders decide to roll the contract by keeping an eye on the volume of both the expiring future as well as the one in the future. Upon the rollover, the trader can decide to switch to the future contract once the volume has reached a specific level in that contract.
For instance, an investor who holds long four S&P 500 futures contracts that have an expiry date in September will sell four Sept ES contracts at the same time and purchase four ES contracts in a future month.
You need to be a member in order to leave a comment
Sign up for a new account in our community. It's easy!
Already have an account? Sign in here.