The process of replacing a near-month contract that is approaching its expiration date with a contract that expires later in the month is known as rollover. It entails ending a position in one contract and starting a similar position in a contract with an expiration date in a month later. The transition could happen in the middle of the month or at the end of the month, depending on rollover contract liquidity and pricing.
To help you comprehend rollovers, consider the following example:
Let's say Raj purchased 100 lots of Wipro futures this month and Ram sold 100 lots of Wipro futures. Both now see an opportunity to benefit handsomely from futures trading in the coming months. As a result, Ram will sell 50 units of Wipro futures and buy Wipro futures with a month's expiration. This is a lengthy transition.
Raj will buy back the current month's Wipro futures and sell the next month's comparable futures. Ram is performing a quick rollover. Raj pays a rollover cost to Ram when he initiates a long rollover, and Ram receives that cost when he initiates a short rollover.
Rollovers are essentially a transition from one contract to another with the same position. A high number of large institutional investors make large rollovers. Individuals who rollover contracts must pay brokerage and other fees in the current month, then pay these fees again in the month in which the contract is flipped.
The rollover spread is the most essential factor in a rollover contract. Individuals or institutions who are undergoing a long rollover would prefer a modest rollover spread. Individuals that trade short spreads, on the other hand, would like to earn as much rollover spread as possible.
READ MORE: All you need to know about Futures and Options trading
How does a rollover work in India?
In India, settlement of contracts takes place on the last Thursday of every month. If that is a holiday, contract settlement takes place on Wednesday. The rollover is completed till the close of trading hours on expiry day; a part of rollover begins one week before the expiry. The rollover process takes place on the trading terminal through a spread window. If any individual holding a futures contract of one month wants to carry forward the position to the next month, it is possible. The investor can do so by keying in the spread at which he/she wants to roll over the position in the coming month.
Why aren't there any rollovers in options?
In options, there is no prospect of a rollover. This is due to the fact that futures must be exercised at expiration, whereas options may or may not be performed. The price of an options contract is complicated due to its asymmetric character. Traders usually wait for options to expire before taking new positions when there is liquidity.
READ MORE: Understanding Options Trading
What are the Futures trading risks?
The leverage connected with futures is one of the most serious dangers linked with them. When a trader pays a 25% margin on futures, he or she has a possibility of making four times the profit. However, there is a danger of losing four times one's initial investment. Traders can lose a lot of money if they utilise leverage incorrectly and take the dangers that come with it. Price risk and a lack of market liquidity are two more dangers to be aware of.
Individuals can employ futures rollover when they believe there is a chance to strengthen their position in the near future. Rollover traders, on the other hand, must be certain about how the market will behave in the future months, or they risk losing a lot of money.
