How to Rollover Futures in India?

All derivative contracts have an expiry date. Traders entering into a contract have to abide by their terms on or before the expiry date. However, they also have the option to carry forward their contracts to the coming months.

This carry forward is termed as the Rollover of Futures Contracts.

What is Rollover?

As the name suggests, rollover means switching a near-month contract that is closer to its expiration date with another contract whose expiry is in a later month.

It means closing one’s position in one contract and opening a similar position in another contract having expiry in a further-out month contract. The switch could be mid-month or far-month; it depends on liquidity and the price of rollover contracts. 

Rollover can only occur in the case of futures and not options.

Here’s an example to understand rollovers:

Let’s say Mr Yadav bought 50 lots of TCS futures in the current month, and Mr Singh has sold 50 lots of TCS. Now both are sensing an opportunity to earn significant profits from next month’s futures trading. So, Mr Yadav will sell the current 50 lots of TCS futures and buy TCS futures with an expiry next month. This is a long rollover. 

Mr Singh will buy back the present month’s TCS futures and sell corresponding futures for the next month. Mr Singh is doing a short rollover. Mr Yadav, who initiates a long rollover, pays a rollover cost, and Mr Singh, who has undertaken a short rollover, will receive that rollover cost paid by Mr Yadav. 

So, a switch from one contract to another with the same position is what rollovers are all about. Many large institutional investors undertake big rollovers. Individuals who undertake rollover in contracts must pay brokerage and other charges in the current month and again pay these charges in the month in which the contract has been switched.

In a rollover contract, the rollover spread is the most important thing. Individuals or institutions undertaking long rollovers would want that the rollover spread is as low as possible. On the other hand, individuals doing short spreads would want to earn as much rollover spread as possible.

You might want to read – How to Trade in Futures and Options

How Does a Rollover Work in India?

In India, the 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 the expiry day; a part of the 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 Can’t Rollovers Happen in Options?

There is no possibility of rollover happening in options. This is because futures are mandatorily exercised on expiry, whereas options may or may not get executed.

Since an options contract is asymmetric in nature, the pricing is complex. Generally, traders leave options to expire; they take fresh positions when there is liquidity. 

Risks of Futures Trading 

One of the most significant risks associated with futures is the leverage associated with them. When someone pays a 25% margin on futures, there is a chance that there can be 4 times the profit for a trader. However, there is also a chance that one can incur a loss of about 4 times. Improper use of leverage and the risks associated with it can lead to very sharp losses for traders. 

Price risk and low liquidity in the market are other risks that one needs to keep in mind.

Final Word

Individuals can use rollover of futures when they sense an opportunity to improve their position in the foreseeable future. However, traders undertaking rollover need to be sure about how the market will behave in the coming months, or else they might incur heavy losses.

Disclaimer: This blog is solely for educational purposes. The securities/investments quoted here are not recommendatory.