Rollovers: What are Rollovers in the Stock Market?

Traders have a few ways to invest in derivatives trading: trading options and futures. In short, contracts and options help traders sell or buy an amount of asset in the contract by the predetermined date. It’s referred to as the contract’s date of expiry. Now, you may ask where the concept of rollovers comes from here, right? To learn more about rollovers in the stock market, let’s read further.

Futures contracts are options contracts where the futures let traders sell or buy the amount of the asset. Until this, there are no differences between futures and options. The difference is in the obligation executed in the contract. In future contracts, the buyers can sell or purchase with some obligations. However, option contracts don’t have any obligations.

Traders who choose these contracts must follow some terms before they expire. However, they also get the flexibility to extend the contracts into the next months. That’s where the role of rollovers comes into being. The process of extending the contracts is best called the stock rollover of futures contracts.

A brief on rollover in the stock market – understanding its meaning

So, what is rollover in stock market? Going by the name, rollover is the transitioning process that can be done from the near-month contract. That means when the contract is nearing the expiry date to another with a later expiry date. It requires closing the position in the contract.

At the same time, it initiates the same position in the next contract set for expiry in a distant month. The specific timing depends on parameters like pricing and liquidity. Note that rollover stock is for futures contracts and isn’t associated with options.

A brief example to explain everything about rollovers in stocks

So, you have learned about the rollover definition. Do you wish to learn the rollover concept in a more explanatory manner? Here’s a compiling example:

Suppose Mr X bought 50 lots of futures, and  Ms Y sold around 50 lots of the same futures. Both have identified the opportunity to gain profits in the futures trading of the forthcoming month. So, Mr X decided to sell the existing 50 lots of the futures and get futures with the expiry date in the coming month. This phenomenon is better termed as the long rollover.

On the other hand, Mx Y repurchased the futures and sold equivalent futures with the expiry date in the coming month. It is better termed the short rollover. When Mr X initiated the long rollover, he incurred the rollover cost. On the contrary, Ms Y undertook the short rollover. So, she received the payment from Mr. X.

Simply put, rollovers include transitioning from one contract to another when maintaining the same position. Different large investors choose rollovers. Participants in the rollover contracts should pay brokerage and fees in that particular month. Incidentally, they encounter such charges once a month when the contract is in transition.

People who consider the long rollovers intend for a minimum rollover spread. On the other hand, the ones involved in the short rollovers wish to maximise the rollover spread earnings.

Understanding rollover data – what does it mean in the world of stocks?

Now, what do you mean by rollover data in the stock market? Simply put, it is the process of carrying the open positions forward in options and futures contracts from the present month to the next one.

Expiration and rollover

Futures are equity derivatives that have limited time durations. They will expire on the last Thursday of each month in a country like India. When the investor wishes to continue the position, they need to roll it over to the upcoming month. It involves closing that position in the present month and then reopening it in the coming month.

Understanding how does it matter

Rollover data suggests every investor’s confidence and sentiments with their investments. When the rollovers are lower than average, it indicates caution. On the other hand, higher rollovers suggest strong sentiments. Any imbalance in the short or long position will give you an indication of the market direction.

Note that rollover numbers are denoted as the percentage of the rolled positions to the total positions. An analyst can compare the percentage within every three months. Note that higher rollovers suggest bullishness, and lower ones indicate caution. If you are a trader, you can roll over at a discount or premium to underlying value. The higher cost suggests a bullish sentiment. 

Rollover in India – how does it work in the country?

Contract settlements in a country like India occur on the last Thursday (every month). If that Thursday falls on a holiday, the date is changed to Wednesday. The rollover is calculated by completing the trading hours on the expiry date. It is calculated with a portion of the rollover starting a week before the expiry. The rollover process is then facilitated via the trading terminal.

Suppose a one-month futures contract holder wants to roll over into the coming month. In such cases, they can do it by stating the spread at which they plan to carry over.

Final verdict

Rollover is a useful tool for investors or traders who want to grab the opportunity to improve their position. However, traders who are rolling over their positions must have a clear idea of the market. They must understand how these will perform in the forthcoming months. If you don’t, you may lose a significant amount of money.

FAQs