Every March, and other quarterly months (June, September, and December) the futures contracts that track interest rates, currencies, and the stock index futures come to the end of their contract life, and expire. This necessitates the need for traders engaged in these markets to exit these contracts and roll them over to the next quarterly month.
This phenomenon is unique to the futures market and to someone new to trading these markets it can sometimes be confusing. Because March is the end of the quarter, the “Rollover” event is happening throughout the month across most futures contracts, particularly in the financials since they expire quarterly. We tend to get many questions from our newer futures traders regarding this topic, and although I’ve written about this subject in the past, I think it’s worth revisiting. In this article I’ll attempt to demystify, and more importantly simplify this rollover occurrence.
Because futures contracts are obligations between buyers (to take delivery) and sellers (to deliver) of the underlying commodity or financial product, they must settle, and therefore expire. The normal life span of most futures contracts vary widely, but this isn’t as important to a trader as it is to know when to switch from the expiring contract to the new “front” month contract as this contract will be the most liquid.
There are two primary reasons that a trader needs to switch from the contract that’s going off the board to the front month contract. The first is that liquidity in the expiring contract starts to dry up immediately after rollover day, and with that, spreads become wider which would lead to trades becoming more prone to slippage. Secondly, if a trader holds on to an expiring contract after the first notice date (the date in which a trader may be required to accept delivery) it may cause all sorts of headaches for the broker, and not to mention the trader himself. This is why it’s imperative to know when this date occurs.
As previously mentioned, the financials (equity indexes, interest rates, and currencies) all carry quarterly expiration, which makes it easier for a trader to remember. All of the traditional commodities such as oil, gold, wheat, and the like, rollover more frequently because many producers use these contracts as a way to hedge against their cash crops or physical production.
As an example, below is a calendar of all the pertinent dates for Crude oil. It in, we see all the different months for one year of year of trading.
The most important date for traders is the settlement which is the last day the contract will trade. A trader will have to rollover the expiring contract a few days in advance of the expiration. There is a calendar, plus an explanation for all the terms listed therein available for all futures contracts traded on the CME at their website here: http://www.cmegroup.com/trading/products/. The products are grouped by sector. To get to the calendar, simply find the specific futures contract and click on the product name link which will take you to the contract specifications page in which you will see the calendar tab.
Lastly, rollover day is different for all of the different contracts. In other words, the number of days before expiration when a trader needs to exit one contract for another varies among the different futures contracts. Below is a list of the groups and days prior to expiration when rollover occurs:
With this information you simply check the product calendar at the beginning of every month and prepare to make the switch from one contract to the next according the rollover days I’ve spelled out above. It’s as simple as that. It’s just an extra step, but a necessary one, when you’re trading —what in my humble opinion — are the best markets in the world.
Gabe can be contacted on this link: Gabe Velazquez
This phenomenon is unique to the futures market and to someone new to trading these markets it can sometimes be confusing. Because March is the end of the quarter, the “Rollover” event is happening throughout the month across most futures contracts, particularly in the financials since they expire quarterly. We tend to get many questions from our newer futures traders regarding this topic, and although I’ve written about this subject in the past, I think it’s worth revisiting. In this article I’ll attempt to demystify, and more importantly simplify this rollover occurrence.
Because futures contracts are obligations between buyers (to take delivery) and sellers (to deliver) of the underlying commodity or financial product, they must settle, and therefore expire. The normal life span of most futures contracts vary widely, but this isn’t as important to a trader as it is to know when to switch from the expiring contract to the new “front” month contract as this contract will be the most liquid.
There are two primary reasons that a trader needs to switch from the contract that’s going off the board to the front month contract. The first is that liquidity in the expiring contract starts to dry up immediately after rollover day, and with that, spreads become wider which would lead to trades becoming more prone to slippage. Secondly, if a trader holds on to an expiring contract after the first notice date (the date in which a trader may be required to accept delivery) it may cause all sorts of headaches for the broker, and not to mention the trader himself. This is why it’s imperative to know when this date occurs.
As previously mentioned, the financials (equity indexes, interest rates, and currencies) all carry quarterly expiration, which makes it easier for a trader to remember. All of the traditional commodities such as oil, gold, wheat, and the like, rollover more frequently because many producers use these contracts as a way to hedge against their cash crops or physical production.
As an example, below is a calendar of all the pertinent dates for Crude oil. It in, we see all the different months for one year of year of trading.
The most important date for traders is the settlement which is the last day the contract will trade. A trader will have to rollover the expiring contract a few days in advance of the expiration. There is a calendar, plus an explanation for all the terms listed therein available for all futures contracts traded on the CME at their website here: http://www.cmegroup.com/trading/products/. The products are grouped by sector. To get to the calendar, simply find the specific futures contract and click on the product name link which will take you to the contract specifications page in which you will see the calendar tab.
Lastly, rollover day is different for all of the different contracts. In other words, the number of days before expiration when a trader needs to exit one contract for another varies among the different futures contracts. Below is a list of the groups and days prior to expiration when rollover occurs:
- Equity indexes - 7 days
- Currencies -3 days
- Interest Rates- 14 days
- Metals-20 days
- Grains -10 days
- Energy-3 days
With this information you simply check the product calendar at the beginning of every month and prepare to make the switch from one contract to the next according the rollover days I’ve spelled out above. It’s as simple as that. It’s just an extra step, but a necessary one, when you’re trading —what in my humble opinion — are the best markets in the world.
Gabe can be contacted on this link: Gabe Velazquez
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