To a trader, a buy-and-hold strategy is not optimal, as price volatility can wipe-out unrealised gains. So, traders actively manage their positions. A rollover strategy is like a buy-and-hold strategy that extends your trading horizon. Should you then rollover? This week, we discuss the factors you should consider when rolling over your futures position.
Roll process
A rollover strategy typically involves closing your near-month contract and initiating a fresh position in a next month contract. Traders consider it a seamless way to extend their trading horizon. But is that optimal? A typical trading strategy involves a price target, an entry price and a stop-loss. You take profits if your price target is achieved or exit your position if stop-loss is triggered. What if the contract does not hit your price target or your stop-loss? Most traders typically have a time stop. You may then want to close the position after a predetermined time (say 10 days) has passed by since you initiated the trade. Why? The more actively your turn your trading capital, the more the likelihood of earning higher returns.
A rollover strategy goes against the concept of time stop. You must, therefore, consider the economics of rolling over your position. First, determine the expected gains if the contract hits the price target after your rollover. All your potential trades must compete for your trading capital. So, check if potential gain is greater if you were to initiate a futures position on a different underlying instead of rolling over the existing position. If so, then rolling over may not be optimal. You must consider the price of the contract you are rolling into (say, July contract) and not the one you are currently holding (say, June contract). This considers the rollover cost. Typically, the next-month contract will trade at a higher price than the near-month contract. The greater the price difference, the greater the rollover cost.
When should you rollover? Suppose the futures contract hits your price target, but you believe the trend continues to be strong. You may close half your position at the initial price target and continue the rest. But what if the futures contract is close to expiry? That is when can rollover to the next month, provided a contract on a different underlying does not offer greater potential gains.
Optional Reading
A successful trader is both skillful and emotionally disciplined. That means traders must moderate behavioural biases that can impact their trading success. The rollover strategy yields to one such behavioural bias: regret aversion, if the economics of the strategy is not considered. You initiate a futures trade that does not perform as well as you expected. Instead of closing your position applying a time stop, you decide to rollover. This gives you another opportunity to make the trade profitable. It also provides you a (continual) process to defer your regret of having entered the initial trade.
(The author offers training programmes for individuals to manage their personal investments)
Published on June 7, 2025
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