In the context of derivatives trading, a rollover means that a position is extended at the end of the trading day, and a new contract is automatically opened when the old one expires. The price of the new contract may differ from the price of the expiring contract, which would result in gains or losses depending on the direction of the open position.
When this happens, an investor’s account balance is adjusted to reflect the impact of the price difference on the P&L of the position. Specifically, the open positions that will gain from the price gap will see the same amount deducted from the account balance, whereas the open positions that will lose due to the price gap will see the same amount added to their account balance.
Please refer to the example below:
Price on old Natural Gas contract: $5.80
Price on new Natural Gas contract: $6.00
Buy positions will gain $0.20 per contract due to the price gap. The P&L on their position will increase by the said amount and their account balance will be adjusted.
Sell positions will lose $0.20 per contract due to the price gap. The P&L on their position will decrease by the said amount and their account balance will be adjusted.
As a result, the account equity will remain unchanged.
Assume that you hold a buy position of 0.20 lots on Natural Gas. One lot carries 30,000 units, therefore you are long 6,000 units of Natural Gas. The price on the expiring Natural Gas contract is $5.80 and the price on the new contract is $6.00. When a rollover occurs, the P&L on your buy position will increase by $1,200. At the same time, a balance operation from our side will adjust your account balance, which will be debited by $1,200. As a result, your account equity will remain unchanged.
Assume that you hold a sell position of 0.20 lots on Natural Gas. In this case, you are short 6,000 units of Natural Gas. The price on the expiring Natural Gas contract is $5.80 and the price on the new contract is $6.00. When a rollover occurs, the P&L on your sell position will decrease by $1,200. At the same time, a balance operation from our side will adjust your account balance, which will be credited by $1,200. As a result, your account equity will remain unchanged.