The process of replacing a one-month contract approaching its expiration date with a one-month contract expiring at the end of the month is known as rollover. It entails terminating a position in one contract and introducing a similar position in a contract with an expiration date of one month later. The transition can happen in the middle of the month or at the end of the month, depending on rollover contract liquidity and pricing.
To help you understand rollover, consider the following example:
Suppose Raj bought 100 lots Wipro Futures this month and Ram sold 100 lots Wipro Futures. Both now see an opportunity to make substantial gains from futures trading in the coming months. As a result, Ram will sell 50 units of Wipro Futures and buy Wipro Futures with the expiry of one month. It’s a long transition.
Raj will buy back the current month’s Wipro futures and sell the next month’s comparable futures. Ram is rolling over fast. Raj pays the rollover cost when Ram initiates a long rollover, and Ram receives that cost when he initiates a short rollover.
Rollover is essentially a transition from one contract to another with the same position. Large numbers of large institutional investors do large rollovers. Individuals entering into a rollover contract must pay brokerage and other fees in the current month, then pay these charges 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 undergoing longer rollovers would prefer a shorter rollover spread. On the other hand, individuals who trade short spreads would like to earn a higher rollover spread.
Read more: All you need to know about futures and options trading
How does rollover work in India?
Contracts in India are settled on the last Thursday of every month. If it is a holiday, the contract will be negotiated on Wednesday. The rollover is completed by the end of trading hours on the day of expiry; Part of the rollover begins a week before expiration. The rollover process takes place through a spread window on the trading terminal. If a person holds a one month futures contract, he/she wishes to carry forward the position to the next month, it is possible. The investor can do this by keying in the spread at which he wishes to roll over the position in the coming month.
Why are there no rollovers in options?
In options, there is no possibility of rollover. This is due to the fact that futures must be exercised at expiration, while options may or may not be executed. The pricing of an options contract is complex 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 Futures Trading Risks?
The leverage associated with futures is one of the most serious risks associated with them. When a trader pays a 25% margin on futures, he is likely to make four times the profit. However, there is a risk of losing four times the initial investment. If traders misuse leverage and take on the risks that come with it, they can lose a lot of money. Price risk and lack of liquidity in the market are two more dangers to be aware of.
Individuals can use futures rollovers when they believe there is a chance to consolidate their position in the near future. Rollover traders, on the other hand, need to be certain about how the market will behave in future months, or they risk losing a lot of money.
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