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Monday, June 30, 2014

Stock Futures Positions Rollovers

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What Is A Rollover?

Rollover involves carrying forward of futures positions from one series, which is nearing expiry date, to the next one. On expiry, traders can either let a position lapse or enter into a similar contract expiring at a future date. Rollovers happen only in futures and not in options.

How Are Contracts Rolled Over In India? How Does It Work?

Equity derivatives contracts in India are settled on the last Thursday of every month (if Thursday is a holiday, the settlement happens on a Wednesday). While rollovers are done till the close of trading hours on that day, a chunk of the rollovers begin a week before expiry. Positions are rolled over to the next month through a spread window on the trading terminal. For instance, if a trader holds one futures contract of Nifty expiring in June, he would enter the `carry-forward this position to June' by keying in the spread at which he desires to rollover the positions to July. The spread window has made it easier for traders to rollover, which was a two-step process earlier.

How To Interpret Rollovers?

Rollover is expressed as a percentage of total positions. There are no benchmarks for rollovers but they are compared on the basis of historical data, especially the trailing three-month average.

Rollover is an indicator of traders' willingness to carry forward the bets on the market. But, the figures will not tell you in which direction traders have bet. On most occasions, lower-than average rollovers signal uncertainty while higher rollovers show that sentiment is strong. Hypothetically, if rollover in Nifty futures from May series to June is at 70% and three-month average is 65%, it means traders are more convinced about their views on the market and are willing to build more positions.

However, at times, rollover trends can be misleading. For instance, 70% roll over may have taken place at a lower base of open interest -number of outstanding positions -while the average of 65% rolls would have happened at a relatively higher open interest base. Savvy traders also analyse rollover trends on the basis of rollover cost. Usually, high rollover costs signal that the mood is upbeat in the market.

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