In the world of futures trading, “Rollover” refers to the process of closing out all positions in soon-to-expire futures contracts and opening new contracts in newly opened futures contracts. The concept of rollover is unique to different futures contracts covering the markets and the rollover has a significant impact on the contract and the market’s volatility, price and volume.
Not all futures rollovers happen at the same time and therefore futures day traders need to keep a close eye on the rollover dates of the contracts that they are trading. Usually, the days leading up to the futures contract’s rollover date is important from a risk management standpoint and duly deserves the full attention of the investors who are engaged in trading the contract.
The closer it gets to a contract’s expiry or rollover, the bigger the challenges that come with it. Rollover in futures is a key aspect that needs to be accounted for and there is no way to getting around it unless you close the position within the active monthly or quarterly contract that you trade. Because a futures contract is finite in duration, there are a few key dates that active traders need to be aware of:
The last day that a futures contract is binding. After expiration, a futures contract is no longer valid.
Last trading day:
The last day when a futures contract can be traded. After the last trading day, delivery of the underlying asset or cash settlement must transpire.
Before a rollover event, NAGA Markets send this info via e-mail to users.
WHY DO FUTURES CONTRACTS HAVE A ROLLOVER?
Futures contracts, as you might know, are derivatives which track the prices of the underlying market. A futures contract is simply a hedging tool where a buyer and seller agree to buy or sell a certain number of units in a commodity or an asset at a certain price for a future date of delivery. Most traders in the futures markets today typically use it to hedge against market exposure, so most of the trading is done for speculative purposes only rather than taking physical delivery of the asset.