Rollover is a necessary practice in the futures markets. Since futures contracts periodically expire, there is a need to transfer or “rollover” the old contracts into new contracts. While rollover and expiration are related events, they are not synonymous.
Futures contracts are derivatives representing some underlying commodity. These contracts are traded over open exchanges much like stocks are traded in the stock market. Each futures contract represents a specified quantity of the underlying commodity. For example, each soybean futures contract represents 5,000 bushels of soybeans.
Unlike stocks, futures contracts expire. It is important that futures traders close out open positions before expiration to avoid taking delivery of the physical commodity. For most futures markets, expiration day occurs on the third Friday of the month in the months of March, June, September and December.
Rollover day is the day on which trading volume is transferred from the expiring contract month to the new contract month. Rollover typically occurs on the Thursday eight days before the Friday expiration. The market for the expiring month is still open until expiration, however, the majority of trading volume in a given futures market moves to the new month on rollover day.
Rollover is significant because traders wishing to hold long-term positions in a market must remember to periodically rollover their futures contracts. While rollover occurs automatically in the Forex market, it doesn’t necessarily occur automatically in the futures markets even though many futures brokers offer automatic rollover services to clients. The point here is that futures traders should always check with their brokers regarding rollover policies and services.
All futures traders should observe rollover day to ensure that they remain in a liquid market. While trading continues in the expiring market past rollover day, the volume decreases drastically. The decreased volume causes increased price spreads and can make it difficult for traders to enter or exit the market at desirable prices.
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