Last Updated on 21 September, 2020 by Therobusttrader
Futures are great securities that are used by many traders. They offer high leverage and access to many markets that would otherwise not be accessible to retail traders. However, since futures contracts always expire, staying invested in one means that you need to know when to roll over your positions.
But how do you roll over a futures contract?
You roll over a futures contract by switching your current contract to one that has a later expiry date. In essence, this means that you close your current position and reopen it in the new contract. In order to know when to roll a futures contract, traders usually look at volume or open interest, to determine when the crowd has moved on to the next futures contract.
In order to understand how and when to roll over a futures contract, there are some things that you must know. In this guide, we will cover what you need to know in order to efficiently roll over your positions.
We will begin by looking at how futures contracts are coded, and what you need to know in order to figure out which contract you will be rolling over to!
How Futures Are Coded
The symbol name of a futures contract consists of the following three parts:
1. The Futures Contract Code
The symbol name, of course, depends on the market. Here are three common markets and their symbol name:
- E-mini S&P-500 futures – ES
- Crude Oil Futures – CL
- Gold Futures – GC
2. The Expiration Month
The expiration month is expressed as a single letter and starts with “F'” for January, and ends with “Z” for December. Here is each month with its corresponding letter:
- January – F
- February -G
- March – H
- April – J
- May – K
- June – M
- July – N
- August Q-
- September – U
- October – V
- November – X
- December – Z
Most futures contracts don’t expire every month, but less often. For example, the equity index futures, like ES ( E-Mini S&P-500) and NQ( E-mini Nasdaq 100) only expire four times a year, on March, June, September, and December. However, most energies like Natural gas (NG) and Crude Oil (CL) do actually expire each month.
3. The Expiration Year
The expiration year is expressed as the last or two last digits of the year. For example, a contract expiring 2025 will be coded “25” or “5”.
Knowing Which Contract to Rollover To
When you trade futures, want to be in the most heavily traded contract, and that usually is the front contract (the one with the nearest expiration month).
Let’s say that it’s May, and you see a great trading opportunity in the ES futures contract (S&P-500). To decide which contract you should buy, you must know the following:
- The symbol name of the contract, which is “ES”
- The expiration months of the contract, which here are March(H), June(M), September(U), and December(Z).
- The year
Now we just puzzle these pieces together like this:
- We know that we are trading the ES contract. Therefore the two first letters are “ES”.
- It’s May, and we know that the nearest expiration month is June. The code for June is “M”, and we add that to the symbol name, which leaves us with “ESM”
- The year is 2019, and we, therefore, add the last or the two last digits, which gives us “ESM19” or “ESM9”
So, now we know that we should trade the ESM19 (or ESM9) contract. Here is a video that explains it nicely
Knowing which contract to rollover to is crucial, but it’s as important to know WHEN to rollover.
How to Know When to Rollover A futures Contract
When it comes to rolling over a futures contract, you want to keep track of two things. Those are:
- The expiration Date
- Open Interest
1. The Expiration Date
The expiration date is, as it sounds, the date when the futures contract expires. Depending on whether the contract is cash-settled or physically deliverable, you may have to take delivery of the underlying if you hold your position through the expiration date. However, most brokers will liquidate your position for you at a small fee, in case you forget to get out of the trade before delivery.
Since most traders are trading futures contracts purely for speculation, and don’t want to take delivery of the underlying asset, they need to get out of the trade before the expiration date. Typically traders want to liquidate or rollover their positions two days before the expiry date. That way they have some time to solve any unexpected issues that might occur.
The expiration dates vary by contract. If you want to find the expiration date for a particular futures contract, here is how you find it at the two major futures exchanges in the US.
Finding the Expiration Date for Futures Trading at CME
- Go to cmegroup.com and put your cursor over “Trading” in the menu
- Click on the category that your futures contract belongs to
- Once you’ve found your contract. Click “View Full Contract Specs”
- Click the Calendar tab
- Fist, Note the contract (month) you are trading and look for the Last Trade date. This is the expiration date
Finding the Expiration Date for Futures Trading at ICE
Just go here and search for your futures contract. Once you find it, click the hyperlink, and you will be taken to a table with the relevant dates. The last trading date is under the “LTD” column, which is the expiry date.
Now we know that we need to roll over our position before the expiration date. But how do you know exactly which day to do your rollover?
One very easy way of doing that is to watch the volume of the two contracts. When you know that the expiration date is drawing close, you watch the volume of the two contracts. As soon the new contract is traded heavier than the one you’re currently in you make the switch.
3. Open Interest
A similar way of doing this is to look at open interest instead of volume. Once the open interest for the new contract is higher than for the expiring contract, you switch contracts.
Which Should You Use?
In case your trading is algorithmic, it might be beneficial to try to replicate the rollover rules of your data provider. That way you ensure that your trading is carried out according to your backtest
Otherwise, using option number two and watching the changes in volume should work very well!
All the information you need about a specific futures contract can be found at the website of the exchange where the contract is trading.
To do rollover you need to know which contract you are going to switch to, and closely watch the differences in volume. As soon as the new contract has more volume than your current contract, you make the switch.