Understanding Rollover Strategy in Futures Trading

What is rollover in futures trading?

In the realm of futures trading, a rollover involves transferring the exposure of a current position to a future contract period. This is typically done to avoid the delivery process or settlement that occurs at the expiry of a futures contract. The process consists of two primary actions: closing the existing position in the expiring contract and simultaneously opening a similar position in a subsequent contract month.

For instance, imagine a trader who has purchased a futures contract for 100 shares of a company named 'FutureTech', listed on the NSE, with the contract set to expire in September. As the expiry date approaches, the trader decides to maintain the position rather than exit at the current market price. To enact a rollover, just before the September contract expires, the trader would sell the September contract, effectively closing the current position, and immediately purchase an October contract for 100 shares of 'FutureTech' at the current market price for the October contract.
By rolling over the position, the trader can potentially capitalize on their longer-term outlook on 'FutureTech's' share price without having to take physical delivery of the shares or close their position for a cash settlement. It's crucial to note that each rollover involves transaction costs and might also involve a price difference between the contracts due to factors such as carry costs, which can impact the profitability of the rollover strategy.
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