Futures contracts are essential tools in financial markets, allowing you to speculate on or hedge against future price movements of an asset. However, since each futures contract has a set expiration date, you might need to roll over your positions if you want to maintain the same market exposure. 

Rolling over futures, or a future contract rollover, involves closing out an existing contract and opening a new one with an expiration date for later. This process, often used in futures and options trading, is straightforward but requires careful planning and timing, especially on a reliable trading platform.

This guide explores what rolling over futures means, why it’s necessary, and how to implement a futures rollover strategy effectively.

What does it mean to roll over futures?

Rolling over futures involves shifting an open position from a futures contract nearing expiration to a new contract with a later expiration. This process is particularly useful for investors who wish to extend their exposure to an asset without closing their position. For example, if you hold a contract expiring in March and wish to keep the same exposure in April, you would sell the March contract and buy the April contract.

Why is a futures rollover strategy essential?

A rollover strategy allows you to continue your exposure to a particular asset without interruption. Without this process, your futures contract would settle on its expiry date, closing your position and possibly requiring you to accept delivery of the underlying asset or settle in cash. By rolling over, you avoid settlement and maintain your exposure to anticipated market movements, which is ideal for long-term traders and investors.

When should you consider rolling over futures?

The timing of a futures rollover is crucial. Most investors roll over their contracts just before the expiry date, although you can do this at any point leading up to the expiry. Here are some points to consider:

• Liquidity: As a contract nears expiration, its trading volume tends to drop. Rolling over before liquidity decreases can help you execute trades at better prices and avoid potential market volatility.
• Spread cost: The spread between the expiring contract and the next contract affects the rollover cost. Typically, futures in the same asset category, like oil or indices, trade at a slight premium or discount, depending on market conditions.
• Market conditions: If there are significant economic events or anticipated market movements, you might consider rolling over early to maintain your exposure and avoid disruptions during such events.

How do you roll over futures on a trading platform?

Most trading platforms provide an easy-to-use interface for rolling over futures contracts. Here’s a step-by-step guide on how to roll over on a typical trading platform:

1. Close the current position: Begin by selling the existing contract. For example, if you hold a March contract, you would sell that to close your position.
2. Open a new position: Immediately buy the next available contract with a later expiry, such as April. This step ensures you retain the same exposure to the underlying asset.

By closing one position and opening a new one, your position is effectively “rolled over,” maintaining continuous exposure to the market.

What factors affect the cost of future contract rollover?

Rolling over futures usually involves a cost, often referred to as the rollover cost. The factors affecting these costs include:

• Spread between contracts: The price difference between the expiring contract and the new contract can vary based on market demand and supply. Known as the contango (premium) or backwardation (discount) effect, this difference can increase or reduce your rollover cost.
• Transaction fees: Platforms typically charge transaction fees for each trade. So, closing one contract and opening another incurs double the usual transaction fee.
• Slippage: If there’s low liquidity in the contract you’re rolling over, you may face slippage, where you buy the next contract at a less favourable price.

How to minimise risks in a futures rollover strategy?

Rolling over futures carries some inherent risks. Here are tips to manage those risks:

1. Monitor liquidity: Choose high-liquidity contracts to minimise slippage and ensure you get favourable prices during the rollover.
2. Plan ahead: Avoid waiting until the end to roll over, as unexpected market events can increase costs.
3. Stay informed on spreads: Regularly check the spread between the current and future contracts. If the spread is unusually wide, it might indicate higher rollover costs.
4. Utilise stop-losses: Implementing stop-loss orders can limit your exposure to adverse price movements during the rollover process.

What are the benefits of rolling over futures?

Rolling over futures helps maintain continuity in your trading or investment strategy. Some of the main benefits include:

• Market exposure: Rollover allows you to stay invested in an asset or market without interruptions, which can be crucial for long-term strategies.
• Avoiding delivery: Many futures contracts are physically settled, meaning you’d be required to take possession of the underlying asset upon expiry. Rolling over avoids this, especially if you’re not interested in physical delivery.
• Flexibility: Rolling over enables you to adjust your strategy based on changing market conditions, allowing you to respond to market fluctuations and other economic indicators.

What are the risks associated with not rolling over futures?

Choosing not to roll over futures can have consequences, especially if the contract is nearing its expiration. Risks of not rolling over include:

• Unwanted settlement: If you hold a physically settled contract, you might be obligated to accept the asset upon expiration, which may be impractical for traders looking to profit from price movements rather than holding assets.
• Loss of market position: Not rolling over would mean closing your position, potentially causing you to lose out on favourable price movements if you intend to remain in the market.
• Market timing risk: If you exit the market without a rollover, you may miss re-entry points, losing out on gains or protection if the market moves in your favour.

Are there alternatives to rolling over futures?

For those who do not wish to go through the rollover process regularly, there are alternatives:

• Exchange-traded funds (ETFs): ETFs are available for commodities, indices, and other assets, providing continuous exposure without the need for contract rollovers.
• Long-term futures: Some investors prefer longer-dated futures contracts that naturally extend over a longer period, reducing the frequency of rollovers.

What is the future of rolling over on trading platforms?

As trading platforms evolve, they are increasingly automating the rollover process. Some platforms offer the option to roll over contracts automatically, streamlining the process and helping traders avoid manual intervention. This trend is particularly beneficial for high-volume traders or those trading across multiple assets.

Investing in the right contract

Choosing a trading platform that simplifies futures contract rollover can make a significant difference in managing your trading strategy. Whether you’re extending a position or optimising your futures rollover strategy, the right platform helps you monitor contract spreads, liquidity, and other factors that influence the cost and efficiency of rolling over futures. Using an informed approach on a trusted trading platform gives you the advantage of smooth transitions between contracts, allowing you to stay focused on your investment goals.