Home/Blogs/What is Rollover and how does it work?

What is Rollover and how does it work?

stock market
Published Date: 26 Jun 2024Updated Date: 26 Jun 20246 mins readBy MOFSL
What is Rollover

Introduction

Derivative contracts have an expiration date, and traders must fulfil the terms on or before the expiry date. But an exception allows you to carry forward your open future position from the current month to the next month. This practice of carrying positions forward is known as rollover. 

Understanding rollover in the stock market

A futures contract has a maximum lifespan of 3 months. But if you want to hold on to the position, you can close down the existing position and take the same position in the next series. You have to “roll it over.”. 

Rollover requires you to close a position in the contract that is about to expire and take a similar position in a further-out-month contract. You can switch mid-month or far-month, depending on the price and liquidity of rollover contracts. 

​​​​​​Start Investing with Free Expert Advice!

An example to elaborate on rollovers in the stock market is shared below. 

You buy 15 lots of a company’s futures in the current month, and your friend sells 15 lots of the company’s futures. You feel the company’s stock prices will rise significantly in the coming months, enabling you to earn substantial profits. So, you decide to sell your existing 15 lots of futures and buy more futures with an expiry date in the next month. This scenario is a long rollover. 

On the other hand, your friend repurchases the company’s futures for the current month and sells the same quantity of futures with an expiry in the following month. This scenario constitutes a short rollover. 

How does a rollover work in India?

The contract settlement date for futures in India is the last Thursday of every month. If that is a holiday, the settlement is preponed to Wednesday. 

The rollover procedure ends when the trading hours on the expiration day are over. A portion of the rollover process commences one week before the expiration. You can choose to rollover your positions using the spread window on your trading terminal. 

How is rollover calculated?

Rollover is represented in percentage. Its mathematical formula is as follows:

Rollover percentage = (Combined mid and far series contracts/Total contracts) * 100

This percentage is an indicator of the trader’s willingness to carry forward current positions to the next series. 

How can you interpret rollovers?

There isn’t a definite standard for rollover numbers. Thus, they are expressed in the percentage of rolled contracts to total contracts. You can compare a rollover percentage with its three-month average. Suppose Nifty’s futures rollover percentage was 38.75% in the rollover contracts from December to January, which is higher than the three-month average of 31.25%. This rise reflects a bit of a stronger sentiment, which means investors are willing to bet in the market. 

A higher-than-average rollover indicates a strong sentiment, whereas a lower-than-average rollover implies cautiousness. Similarly, any gaps in long or short positions reflect the direction the market is betting on. 

Some analysts observe absolute changes in rollover quantities, but comparing them with the three-month average is easier. It is also possible to interpret rollovers based on costs. For example, while rolling over, you may enter into the next month’s contract at a discount or premium to the value of the underlying asset. As a result, the cost of carrying the rollover becomes higher, which would represent a slightly bullish market

How can you access rollover data?

You can easily access stock market and trading data on exchanges and other online portals. However, accessing rollover data is difficult. You can make interpretations of rollovers by calculating and categorising large volumes of trade data instead of searching for data through different online platforms. 

Are rollovers possible in Options?

No. Rollovers are strategies used only in the futures market. This is because futures come with the obligation of settlement on the expiry date. On the other hand, with options, you may or may not exercise the contract on expiration. 

The bottom line

Rollover, or rolling a contract over, refers to transferring open positions in a futures contract from the current month to the next month. It is a powerful tool if you feel you can enhance your future position. But you must engage in rollovers only when you have a clear understanding of how the market is expected to perform in the coming months. You can suffer substantial losses if you don’t have the required information. 

 

 Related Articles: How to Open a Demat Account Without a Broker | Factors to Keep in Mind While Opening a Demat account | Factors to Consider When Opening a Demat Account 

 

Popular Stocks:  ICICI Bank Share Price | HDFC Bank Share Price | CDSL Share Price | UPL Share Price | TCS Share Price | BHEL Share Price | Trident Share Price | IRFC Share Price | Adani Power Share Price

 

You may also like…

Disclaimer: The stocks, companies, or financial instruments mentioned in this blog are for informational purposes only and should not be considered as investment recommendations. It is advised to consult with your financial advisor before making any investment decisions. Investment in securities markets are subject to market risks, read all the related documents carefully before investing. Investors are strongly encouraged to carefully read the risk disclosure documents prior to participating in market-related investments or trading activities. Due to the volatile nature of financial markets, no guarantees can be made regarding investment returns. Motilal Oswal Financial Services Ltd. does not offer any assured returns on market-linked securities. Please note that past performance of stocks or indices is not indicative of future results.
Open Demat Account
I wish to talk in South Indian language
By proceeding you’re agree to our T&C