What is Futures Contract Rollover?
Futures trading offers access to a rich variety of financial markets which allows traders a sense of flexibility. However, one limitation when it comes to trading Futures is the fact that these contracts have an expiration date.
Futures traders may want to carry their positions beyond their expiration dates and maintain longer exposure to the market. In this situation, rollover allows traders to do just that This is where Futures rollover comes into play, and here’s what you need to know about it:
Futures Expiration Date and Codes
To better understand Futures rollover it is important to understand how Futures dates and codes work. In Futures contracts, each month has its own code. Accordingly, knowing these codes is crucial to understanding when and how to roll over. Here’s a list of the full months’ codes:
For example, the “SIQ3” contract refers to a Silver Futures contract. Keep in mind that because of holidays, calendar anomalies, and quirks of certain markets, not all Futures contracts will expire within their listed expiration month. For more information about Futures contracts terminology and codes, check out our article on Futures terminology and symbols.
How to Roll a Futures Contract
After understanding how Futures contracts read before a Futures contract expires, traders that want to extend their position past the contract’s expiration date can roll them. This is done by opening a new lengthier contract based on the same underlying financial instrument and the current price of the initial contract.
As Futures contracts expire at a fixed date, a Futures roll enables traders to maintain continuous market exposure longer than the original expiration date. And, as such, the rollover trade occurs shortly before the expiration of the initial contract.
Consequently, if, for example, a trader is rolling over a Crude Oil Futures contract that is supposed to expire in July, the current Futures contract will be closed and a new position will be opened in the August expiration.
How Often Do Futures Roll Over?
Futures contracts roll over on different dates depending on the type of contract and underlying asset. For example, an S&P 500 Futures contract typically expires on the third Friday of the third month of every calendar quarter. As for the frequency of rollovers, traders may roll over their contracts as much as they like as long as they adhere to the correct timeframes.
When and Why to Rollover a Futures Contract
Whether or not to rollover a Futures contract is solely based on the trader’s objectives. If traders aim to maintain the same position past the expiration date, then they may opt to roll over a contract as it nears its end, which involves closing a current contract and opening a new one with a later expiration date. Furthermore, rollover allows traders to maintain the same risk exposure after the contract expires.
When rolling Futures contracts, traders are required to settle the profits or losses incurred in the original contract. Futures contracts may be physical or cash-settled. In this sense, in physically delivered Futures contracts, the position should be closed before the First Notice Day (FND).
A Futures contract's First Notice Day refers to the date on which holders of short and long futures positions are informed that they must deliver the underlying commodity. While in cash-settled contracts, the position must be closed before the Last Trading Day which is the last trading day of the contract. It is important to note that physical settlements are only conducted for Commodity Futures such as grains and precious metals, whereas cash settlements are purely financial in nature allowing traders to buy or sell Interest Rate, Equity Index, and even Commodity Futures without the risk of physical delivery.
Futures rollovers involve closing out underlying contracts that are approaching expiration and opening new contracts for the same asset with a later expiration date. This way, the market position is maintained past the expiration date. Depending on the difference in price between the expiring contract and the new contract, rolling over a futures contract can result in a gain or loss. Nonetheless, Plus500 traders should bear in mind that at this time, Plus500 Futures, does not offer rollover.