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March 13, 2015 - Futures Contract Rollover Days
How do Futures Contract Rollover Days Work by NetPicks Trading Systems
The rollover day for a Futures contract is one of the most misunderstood features in trading these contracts.
Quite simply, Rollover Day is when traders start to exit the expiring contract and begin trading the front month contract that expires some time in the future.
As part of your job as a trader, you must understand when the contracts expire and ensure you buy/sell out of the existing contract before the date of expiration.
The expiring contract can still be traded, as it is still available up to the expiration day, but the liquidity will suffer and you are best advised, if you want to continue in this position, to change to the new contract.
Liquidity: The degree to which an asset or security can be bought or sold in the market without affecting the asset’s price.
This will avoid the problems associated with reduced trading volume which I will highlight later in this article
The word “contract” when referring to the Futures market is an actual contract complete with obligations for both the buyer and the seller.
The buyer agrees to take delivery, if trading in commodities such as cattle, and the seller agrees to deliver the product.
Trading in financials, the Futures contracts would be settled in cash.
The fact is that for the majority of traders, actual delivery never takes place as they are speculating on prices and not actually buying the product itself.
Futures Contract Rollover Days Can Differ
The instrument you are trading has a specific day that rollover occurs. All instruments are not created equal though as some expire quarterly and others expire monthly.
Some of the most popular e-mini contracts are the ES, Dow, and the Russell and they are known as stock index instruments. These expire quarterly in the months of March, June, September, and December on the third Friday of the month at 9:30 EST.
Note: Each expiration month is represented by the following letters: March (H), June (M), September (U), December (Z)
Let’s use the ES for an example highlighting the March 2015 expiration: ESH15
The March 2015 contract expires on March 20, 2015. The rollover to the June Futures contract (ESM15) is 8 days before expiry which is March 12, 2015. This is when you want to monitor the volume in your market as many traders begin to exit that current contract. Most traders that I speak with will either change contracts on rollover or will trade the front month the next day. Another popular Futures instrument to trade is Crude Oil or CL.
Instead of a quarterly rollover, Crude Oil Futures rolls on a month to month interval.
Keeping with March 2015, you’d be trading CLH15 but rolling over to the April contract CLJ15 in the following manner:
Trading the current month CLH15 will stop on the third business day prior to the 25 day of the month.
If the twenty-fifth calendar day of the month is a non-business day, trading shall cease on the third business day prior to the last business day preceding the twenty-fifth calendar day. (http://is.gd/clcontract)
Ensure that for any Futures market you trade that you are fully educated on the rollover particulars to avoid any issues with your trading positions.
Effects of Rollover
You may have heard about difficulties with liquidity, and increased volatility associated with rollover days. These result from the changeover that happens. Most traders move from trading the current contract into the next contract, and that means that the volume of the expiring contract becomes less, usually resulting in larger spreads, and the trading volume for the next period increases.
Volume: Total amount of futures contracts bought and sold during trading day (other time frame)
Here we have a comparison of volume between the expiring month and the front month.
You can see the gradual decline of volume plus the incline of volume in the front month. If you are not paying attention to rollover, you may start seeing its effects in terms of liquidity.
The increasing spreads on the expiring contract can be harmful to you if you day-trade, and the new contract will usually have very tight spreads on the rollover day. This is also important if you are a longer-term trader who wants to carry the contract past the expiration date, as the small spreads mean that you will pay the least to do the transfer.
If you are considering opening a position within a few days of rollover day, then you may find it better to use the new contract at the start.
Don’t Fear Contract Rollover
Futures Contract Rollover is not complex but it is something you should be extremely aware of. While most markets rollover at the same time, as we have seen with crude oil, there can be differences.
Just ensure you are checking the calendar and unless you are holding long term positions, begin trading the front month contract when most of the players change over.
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What Are Futures?
In finance, a futures contract is a standardized contract, traded on a futures exchange, to buy or sell a certain underlying instrument at a certain date in the future, at a specified price. The future date is called the delivery date or final settlement date. The pre-set price is called the futures price. The price of the underlying asset on the delivery date is called the settlement price.
A futures contract gives the holder the obligation to buy or sell, which differs from an options contract, which gives the holder the right, but not the obligation. In other words, the owner of an options contract may exercise the contract. Both parties of a "futures contract" must fulfill the contract on the settlement date. The seller delivers the commodity to the buyer, or, if it is a cash-settled future, then cash is transferred from the futures trader who sustained a loss to the one who made a profit. To exit the commitment prior to the settlement date, the holder of a futures position has to offset their position by either selling a long position or buying back a short position, effectively closing out the futures position and its contract obligations.
Futures contracts, or simply futures, are exchange traded derivatives. The exchange's clearinghouse acts as counterparty on all contracts, sets margin requirements, etc.
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