Rollovers and Expiration Dates in Futures Contracts

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A futures contract legally obligates an investor to buy or sell a particular security or commodity at a predetermined price and time, and this is facilitated on a futures exchange.

When a futures contract expires, the buyer must buy the agreed asset at a predetermined price, regardless of the market price at expiration. The seller is obliged to deliver the goods.

Because futures contracts are standardized, they specify the quantity, quality, location and time of physical delivery of the asset. The contract applies the same terms to both parties.

A futures contract guarantees the buyer payment of an asset at a certain price and delivery on a certain date. The seller gets a guarantee that the asset will be sold on the agreed date.

Investors use futures contracts to hedge the price of an asset, with buyers hoping to pay less than the market price on the expiration date and sellers hoping to sell it at a higher price than the spot price on that day. deliver.

Futures contracts allow buyers and sellers to speculate on the price of an asset in hopes of making a profit.

Explain the concept of rollover in futures contracts

A rollover in a futures contract allows an investor to extend the term of the original contract by closing a futures position close to expiration and opening the same new position with a later expiration date.

Profit or loss on the original contract must be settled in cash before the last trading day. With a physical delivery contract, the investor must close it before the first day of the announcement. Once the position is closed, the investor is automatically entered into the same futures contract with an extended expiration date.

The current location is changed to the new location. For example, if you have a long position, you sell the current position before the contract expires and then simultaneously buy the same position for the next month.

If the current trend is expected to continue from month to month, the investor uses a futures contract swap. An investor wants to maximize his profit by taking advantage of the trend by closing the position later.

Investors must pay a renewal fee, and a new contract may cost more than the old one, resulting in a premium to renew the contract.

By switching the futures contract, the investor reduces the possibility of a loss for his hedged position.

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Reasons why traders choose to trade futures contracts

Investors use volatility as a risk management tool. A futures contract allows an investor to fix the exact price of an asset in the future to avoid extreme price fluctuations, potentially avoiding the possibility of paying prices higher than current market prices.

Substitution helps investors reduce potential losses. It also helps the investors to get optimum profit if the favorable trend persists for several months.

Rollovers also act as a strategy to diversify your portfolio. You can convert a short-term trade into a long-term position to get favorable results.

Explain the expiration process in futures contracts

Expiry date is the last date on which the contract can be traded. Once the contract expires, it can no longer be sold. The billing process starts when the validity period ends.

US stock and index futures contracts expire on the third Friday of every third month. Expiry dates for 2023 are March 17, June 16, September 15, and December 15.

The exchange that makes the market sets the expiration date for each futures contract.

Discuss the factors affecting the expiration of futures contracts

The main factors affecting the expiration of futures contracts are the effect on the trading volume of the asset, the price movement after expiration and the very high volatility of the returns on the date of expiration.

Supply and demand are used to determine whether a futures contract will be valued at fair value and whether the price will go up or down. Futures markets are interdependent and supply and demand can be linked because some futures contracts serve as inputs for other contracts.

For example, the price of oil makes up the majority of the price of gasoline. These two commodities are interrelated, so an investor who ignores crude oil and focuses on gasoline supply and demand may overlook the importance of these related markets.

Conclusion

The expiration date of a futures contract is the last trading day of that contract. Investors can reduce costs and seek to maximize profits through a rollover that extends the expiration date by opening the same position.

Understanding expiration dates and rollover periods can help you manage risk and maximize returns to set you on the path to a successful futures trading journey.

FAQ

Q

Does it make sense to trade futures close to the turn?

A

Rolling days are times when futures markets can be unpredictable. Although traders believe in volatility, swing days may not be the best time to trade futures, especially for new traders.

Q

What is the expiration date of futures?

A

Futures contracts expire. As the contract nears its expiration date, it may become more attractive to trade as it approaches the underlying spot price.

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