Rollovers and its Significance - Futures Trading

 Contract Rollover - Future Trading

As you may know that Futures are contracts between two parties that agree to sell/buy an asset at pre-agreed price on a future date. Future contracts are obligations and the parties have to settle either in cash or with the physical delivery of the underlying asset on the expiry date of the contract. 

However, the buyer of a future contract, on or before the expiry day, can rollover his position. Rolling over the position simply means that you sell your current holding and simultaneously buy a similar future contract, of same underlying asset but with an expiry date further to the current month.  

For example, you bought a future contract for ICICIBANK with an expiry date of 24 September 2020, now on September 24 or before that you can rollover you position in ICICIBANK and buy a future contract with expiry date of 29 OCTOBER 2020. 

Why would you rollover your position?

One would rollover his/her position with an estimation that either current trend will continue and one would like to stick with it or one estimates that even though their position currently is at loss but the trend reversal is around the corner and that is why they will rollover their position.

By rolling over the position, one can skip contract settlement obligations at the time of expiry date. That means you are not required to either in cash or physically settle the contract.

Cost associated with rollover

When you rollover your position it means you are selling your current holding and immediately creating a similar holding just with an expiry date that is on further date in future. Since you are doing  two transactions (sell and buy) you will need to pay brokerages/commission/fees for both your transactions as you would pay for regular buy and sell transactions. Further more depending on the current market price and your position you will need to pay price for the future contract that does wary.

Insights from Rollover data

The stock exchanges do not publish the future contracts/Open Interest rollover data on their websites directly. This data needs to be calculated manually by a trader. The below formula is used to calculate the rollover percentage for any future contract:

Since we can get great bit of information on how the traders in market feel about their current positions StoxFactor tracks and provide this information in its dashboard.

The current series Rollover data is typically compared with its historical averages like 3-month average rollovers. Higher percentage indicates traders' willingness to carry forward their current positions. It does not tell how many traders have carry forwarded their positions expecting for trend reversal or to increase their profit margin with the ongoing trend of market. 

However, if you consider the price movement and total number of open interests along with the rollover %, you can guess with higher probability the mood of the traders. 

In addition, just looking at the percentage number may mislead you, therefore you should also look for the base number for the total open Interests (Futures COI column in the preceding table). Why do we say so? Let us try understand it with an example, 90% rollover of 60,000 OI will be 54,000 but 85% of rollover of 100,000 OI will be 85,000. If you will simply focus on the % value you may miss the significance of higher number open interests or contracts that were rolled over. 

To sum up, rollover % in tandem with other variables, is a good indicator to understand the mood of other traders, hence the overall market.

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Reference: https://www.nseindia.com/products-services/equity-derivatives-position-limits