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Market Primer: What Is A Rollover?

Tomorrow is “rollover” day.  As a trader what does that mean? 

A futures contract is a trading vehicle that gives you excellent leverage for your trading dollar.  Much like a “supercharged” option, it has an expiration date on the third Friday of each quarter month, which is March, June, September, and December. That day is when the futures contract must be settled.  This is the expiration date.  We are currently in the December contract.

As the underlying futures contracts might require a physical delivery, the normal process would be to close out the contract in advance of the expiration date.  An alternative to closing the contract is to roll it into the next quarterly period.  In this instance we are rolling into March.  The first day the March contract is available is tomorrow, approximately 8 days before expiration.  This is the rollover date.

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.

The expiring contract can still be traded, as it is still available up to the expiration day, but generally the liquidity will suffer and you may want to consider, if you want to continue in this position, to change to the new contract. This will avoid the problems associated with reduced trading volume. The big shift in volume happens at 9:30 EST on rollover day.

The increasing spreads on the expiring contract can be harmful to you if you daytrade, 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.

Suz
@SuzyQ76022
Suzie@OptionMarketMentor.com