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What is Rollover In Stock Market

27 Apr 2023

In derivatives trading, that is, in the trading of futures and options, traders have certain ways to trade. Futures and options are contracts which allow traders to buy or sell a certain amount of an underlying asset in a contract by a predetermined date. This date is known, simply as, the date of expiry of a contract. So, where and how does the concept of a rollover enter the picture? It’s worth getting into a few basics first. 

Derivatives Contracts - Some Basics

Futures contracts are the same as options contracts in that futures contracts allow traders to buy or sell a fixed amount of an underlying asset by a particular date, and at a fixed price. Up to this point, there is no difference between the contracts. However, in a futures contract the buyer has the right to buy or sell the contract and is obligated to do so. In options contracts, there is no obligation to execute the contract. 

Once this is grasped, the concept of rollover will become clear. It is important to note here that rollovers occur with regard to futures contracts. 

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What is the rollover?

It is now understood that futures are contracts which hold good for a specific period. Given this, the life of any futures contract is a maximum of 3 months. With both futures and options contracts, any expiry date is always on the last Thursday of any respective month. 

However, some traders may wish to continue to hold their positions and take the same position for the next series of a contract. In such cases, the current position would have to be shut down before the date of expiry. This is the meaning of rollover in the stock market. The activity is popularly termed “rolling over the position”. 

In case traders believe that they may have more profitable returns if their positions are carried forward to the subsequent series of a contract and another date of expiry, they may want to undertake the rollover activity. Sometimes traders may have some information on the sector traded in prompting them to opt for rollovers. 

The Rollover in the Stock Market - How it Works

How does the rollover mechanism in the stock market work? A better question to ask would be, “How or when do rollovers take place?” Now that you understand what the concept of a rollover is, you will probably understand the answer to all these queries clearly. 

In the stock markets of India, derivatives of equity have an expiry date that is aligned with the last Thursday in any given month of the year. Therefore, a rollover can take place till the end of a trading session on that specific day. The majority of rollovers tend to take place at least a week prior to the date of expiry of a futures contract and they end up to the last moment of the date of expiry. These contracts then get “rolled over” to the subsequent month. 

Interpreting Rollovers - What Investors Should Know

Rollover numbers do not have definitive benchmarks. Rather, they can be expressed as percentages of positions that are rolled relative to the total of the positions taken. While there are those analysts who make a note of absolute changes pertaining to rollover quantities, the more common practice is to make a comparison of a rollover percentage with its trailing 3-month average number. 

An example will help to make this clearer. Say, in the rollovers that take place from June to July contracts, the Nifty futures experienced a rollover of 56.95%. Assume that this percentage was a rise from the 3-month average number of 52.15%. This would indicate a marginally stronger sentiment. A rollover can be a quick metric to determine an investor’s willingness to take a chance on the market. 

Therefore, if a rollover is lower-than-average, this indicates cautiousness. Contrastingly, if a rollover is high, the indication is that of strong market sentiment. In line with this, if there is an imbalance within short positions or long positions, the indication is to follow the direction of where the market is going. 

An Interpretation of Rollover According to Cost

A rollover in the stock market can also be interpreted according to cost. For example, while in the activity of rolling over a particular position, a trader may enter a contract for the next month at a discount or a premium compared to the value of the underlying asset in a contract. Put simply, the rollover can take place at a higher cost of carry. In turn, this would indicate some extent of bullishness. 

How do you get access to rollover data?

Traders and investors can easily gain access to trading and stock market data from exchanges and various other online portals. However, rollover data is not so easily accessible. Instead of searching for data and doing research through different online portals, traders and analysts can make interpretations of rollovers just by categorising and calculating substantial amounts of trade data. 

Do you find rollovers in options trading?

As mentioned earlier, rollovers are distinct from futures contracts. Why is this, you may ask? This is since contracts in futures trading must be closed by the date of expiry. There is no “option” to let go of the trade as this exists in options trading.

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Rolling over a contract, or rollover, means that investors and traders carry forward the futures position from the current month in which it is held to the next month. The rollover is conducted closer to the date of expiry of the current month’s contract. Rollovers happen for reasons best known to individual investors. For instance, if a trader thinks that the Nifty will increase in the next month, they may want to hold their positions to ensure a potential profit. However, it must be noted that the rollover of a futures contract is not permitted during a ban period as stipulated by the Securities and Exchange Board of India. During the ban period, no futures and options contracts are permitted. The ban is put into action when any stock’s open interest crosses 95% of MPWL, or Market Wide Position Limits. 

If you are interested in F&O trading, you must do your homework thoroughly beforehand. You should also assess your own risk appetite and time horizon for any investment and tread carefully as you move ahead. 

 

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