What Are Rollovers In The Futures Contract?

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Futures contracts

What separates the futures contracts from the stocks is that in the futures market you cannot buy and hold on to your position. There is a length of time until which the futures contract will stay live. When you buy or sell a futures contract, you get into a contract to buy or to sell the asset at a fixed time in the future. This is the maturity period or also known as the expiration date. This means that all the futures contract end but that does not mean that you are forced to exit the trade because the contract is about to expire.

Rollover of the futures trading position

Suppose that you are bullish on a commodity say Gold and you thus buy a January month futures contract of gold. Markets move around and in the month end, you see that you are at a slight loss. You still are optimistic that the gold prices will rise so what should you do in this case? You need to sell off your January contract and buy a March contract. This will let you still continue your bullish stance on gold and gives the market time to take its course.

This concept is known as a rollover.

Factors that you should consider

When you roll over your contract there are a few things that you need to consider. In most cases, there will be a small difference in the contract prices and this is because of the difference in the period of delivery. This difference is known as the forward premium or the forward discount. This will be as per which of the two futures contract is more expensive. This difference is known as the spread between the contracts.

It is important that as a trader you notice whether the following contract is at a premium or at a discount. If the difference is high then this could make it difficult for the rollover to get justified when the futures contract of the following month is trading at a very high premium.