Traders' Roundtable

After a good deal of short term trading, I have begun the quest of learning to trade long term in expectation of bigger moves.

When the current contract nears expiration, when do you begin to look to roll into the next contract? Do you watch the open interest? Is there a general time frame? Two weeks from expiration? One month from expiration?

Thanks for the help!

There is not a simple, one size-fits-all, answer to this question. It is highly market dependent. For most markets where you want to be trading the near month, there is usually a specific date when almost all the liquidity rolls to the next month. For example, in something like the CBOT financials, they usually move completely to the next month out on the 2nd to last business day of the month prior to expiration. You should go with the liquidity. For something like the Bund, its FND is after the end of trading of contract, so the front month goes right up until the day before the contract expires before the "big shift" happens. The SP, Nasdaq, Dow all roll on the pit open the 2nd Thursday of expiration month. The Dax, FTSE, Stoxx all roll on the day before expiration -- both months are very active at this time in these and well arb'ed too since they're electronic like the Bund.

So I've just scratched the surface on a few markets for you as the list is long. One point to make is that in STIR markets (short term interest rates) like Eurodollar, Euribor, Short Sterling, etc., the roll date you'll find most useful is usually many months prior to expiration. For example, right now the "front month" at the CME (the one that gets the big pit space) is the Mar04 contract. In any event, you will find the most sensitivity to roll date in STIRs compared to any other futures market for obvious reasons (interest rate curve). Try creating a number of different continuation series, roll 1, 3, 5, 7, 9, 11 months prior to exp to create a few different ones, and then runs some tests on long term systems. You will find some "interesting" results.

Cheers,
Chuck

This is an area I need to put more thought into. I suspect that I am far to casual with my rolling.

It is the one aspect of long term futures trading that I do not like. You r roll methods can influence teh PnL outcome of a trade, even if it is a great trend.

There are other things to consider such as deliverables and fixed carry charges between months.

If a contract is non-deliverable like the E-mini S&P, you can hold to the end, whereas firms like IB (where I trade at) will force you to get out or rollover three days before the First Notice Day on a deliverable like Natural Gas (so you don't have a choice.) Similar to what Chuck said, I move to the new contract when the volume starts passing up the current month. If the current month is trending so well, I won't rollover because the gain outweighs the skid in holding on to a contract that is becoming less liquid. Ironically, when the current contract is trending well, it usually is very liquid - so you can stay in as longer. When the curent contract is not trending, the liquidity starts drying up, and you start skidding when you roll over.

The E-mini S&P and gold markets have fairly even carry charges (e.g., even differences in price) so when it trends up or down, all the months move in tandem and you won't really "lose a lot of the trend" when you roll. When you start geting markets that can go from normal backwardation to an inverted state, that's where rolling over will impact trend and profitabillity performance.

Ed

TraderTodd wrote: When the current contract nears expiration, when do you begin to look to roll into the next contract? Do you watch the open interest? Is there a general time frame? Two weeks from expiration? One month from expiration?

Like everyone else has already said, it varies for different kinds of futures. If you have a service like CSI, I recommend generating a few actual (non continuous) contracts for the futures that you are interested in, and just looking at the pattern of volume and open interest near expiration. After looking at two or three contracts it will become very apparent when most people do the roll-over. In some futures people roll over almost at the same time (ie S&P), while in others the roll-over is more spread out (ie Treasuries).

-bbc

During rollovers, does one close out the current contract by taking the opposite position and then enter a new contract in the new front month contract? If that is the case, are commissions unavoidable even if one desires to hold the position for the long-term?

Sad but true

When looking at simulations you need to allow extra slip+com for rollovers. I've found an extra 70 per roll to work. Alternatively assume that you get an average 1 roll per position on a medium term system and use 140 with tradestation etc.

I came across this article and thought of you guys.

Back-Adjusting Futures Contracts - http://www.traders2traders.com/papers/b ... tracts.htm

red