What is Rollover in Futures Trading? Steps to Do Rollover in Futures

A roll over in futures trading occurs when you close a near-month futures contract and open a far-month futures contract simultaneously. The benefit of this is that your position is extended instead of being closed at the time of the expiry of the futures contract.

Most seasoned investors take advantage of rollovers in futures to leverage the potentially favourable price movements of the underlying assets in the future. For example, you may hold a long position in an index future and think the market will spike up the following month. In such a case, you can rollover your position and remain invested in the underlying asset without losing out on this potential uptick in price movement.

Why Execute a Rollover in Futures?

If you are still apprehensive about executing such an advanced strategy, then here are some reasons why this can potentially benefit you.

• Maintaining Market Exposure

If you know how to rollover futures, you can avoid closing your existing futures position and instead continue to profit from potential upward price movements of the underlying asset in the future.

• Cost of Carry

Sometimes, futures contracts may vary steeply in price due to additional cost variables like interest and dividends. In such cases, rolling over your existing position can save you from paying these expenses again in a new futures contract.

• Market Liquidity

When market liquidity is low, you may find it challenging to sell a futures contract and buy another one. In such cases, the rollover strategy saves you from the hassles of buying and selling while maintaining a favourable position.

How to Do Rollover in Futures: The Right Timing

There are some things to consider before doing so, like the right timing. To understand the right timing for executing a futures rollover, you should consider the cost of carry and liquidity.

For example, if the price of an underlying stock is ₹450 and its futures contract for the next month is selling at ₹455, then the cost of carry is ₹5 per share. So, when you see that the cost of carry exceeds the cost of rolling over the futures contract, you may want to consider futures rollover instead.

On the other hand, if the market liquidity is high, a rollover strategy is the easiest to execute. Implementing a rollover becomes easier if there is a significant trade volume in the far-month futures contract. So, you may want to time your rollover for when market liquidity is highest.

How to Do Rollover in Futures: Step-by-Step

The best way to understand a futures rollover is by doing one yourself. To do this, here is a step-by-step process that even newcomers to futures trading can potentially try out.

• Step 1: Evaluate Your Position: You should start by evaluating your current futures position. For example, you may have 100 units of Company A stock, each currently priced at ₹1,500 per share.
• Step 2: Calculate the Cost of Carry: You can then calculate the cost of carry to gain further perspective. For example, a November futures contract is trading at ₹1,505 while the December contract for the same underlying asset is trading at ₹1,510, resulting in a ₹5 per share cost of carry.
• Step 3: Review Market Liquidity: You should then check for market liquidity. If it is high enough for the November futures contract, then you can rest assured there are minimal chances of price slippage. In such cases, you can proceed to the next step.
• Step 4: Placing an Order: Finally, you can now place an order for a futures contract. For example, you can start by selling 100 lots of the November contract at ₹1,505 and, at the same time, buy 100 lots of the December contract at ₹1,510.
• Step 5: Keep Monitoring: Once you have executed the rollover successfully, you should not stop there. You now need to keenly monitor the market for any changes in the prices of underlying assets and market volatility.

How to Rollover Futures in India: Strategies

While the steps may remain the same, each futures rollover needs to be executed with some predetermined strategy, here are some strategies:-