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Benjamin Schmitz

What is a futures rollover?

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Futures contracts have an expiration date, unlike equities which you can trade indefinitely. As a futures contract nears its expiration date, traders have the option to roll over their expiring contracts to a contract with a later expiration date to avoid the obligation of settling the existing one. Most futures contracts expire on the third Friday of the month, although this can vary depending on the contract. If you don’t intend to roll over your contract, you have two other options:
  • You can offset your position to neutral by buying an equivalent number of short contracts if you are long, or long contracts if you are short.
  • You can settle the position with cash or delivery of the underlying asset.
If you do plan to roll over your contract, there are three dates to keep in mind. The first is the expiration date, which is the last day the contract is binding. Once a contract expires, it is no longer valid. The second date to note is the last trading day. If you haven’t traded your contract, you need to begin the process of settling it. The third period to note is the roll date, which is the period of time you can switch from a front-month contract to a forward-month one. For the e-mini S&P 500, that date is the second Tuesday of the month in which the contract expires, or a period of eight days. Other contracts have different roll dates; treasury futures roll two days before the first intention day. Many brokers offer an automatic rollover service for their clients; if you’re trading futures, you should definitely be aware of your broker’s policies and applicable fees. Experienced traders tend to manage their own positions without falling back on the automatic rollover because there is marked volatility surrounding these dates. Volumes will shift tremendously around the roll date as traders move to close out their positions and open new ones. You’ll see wider spreads, as well, which can make it difficult to manage trades. You should also beware of witching days, which can lead to extremely erratic market behavior. A witching day occurs when different asset classes expire on the same day. There are eight double witching days, when both the stock index futures and index options expire. This happens the third Friday of every month except in the months of March, June, September, and December. Triple and quadruple witching happens four times per year, on the third Friday of the months of March, June, September, and December. Triple witching is when index futures, index options, and single stock options expire. The fourth “witch” is single stock futures, which also expire on the days mentioned above. Witching days are extremely volatile and difficult to predict; you should adjust your trading strategy accordingly. Some traders avoid these days entirely simply because the heavy trading volume makes it very hard to manage trades effectively.

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Hi Benjamin,

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.
 

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Hi Benjamin,

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.
 

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Hi Benjamin,

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.
 

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