Tuesday, February 25, 2014

Contract Rollover Tutorial; SchoolOfTrade.com



Today we take a look at Contract Rollover for Futures traders and how it can play a part in the markets we decide to trade on a given day. 

This is a VERY important aspect of trading that EVERY futures trader NEEDS to know about!


Contract Rollover Basics:

Contract Rollover applies to Futures Markets (does not apply to CFD's, Forex, or Stocks), and is simply the date at which the current futures
contract month expires and the
next futures contract month becomes active.


Futures contracts are very different than other asset-classes that you can trade because Futures contracts are intended to be short-term instruments that are used for hedging.

Remember...Futures markets were created to help people 'hedge' against rising or falling prices in the future.

As an example, a Corn Farmer would want to hedge against falling prices of corn in the time it takes for him to go to harvest. If the Corn Farmer sells a Corn Futures 'contract' then he will protect himself against the falling prices of physical corn between today and the date when he harvests his corn growing in the field. If the price of corn drops between now and harvest date, the farmer will lose money on the physical corn when he harvests and sells it, however, the farmer will profit from his short position in Corn Futures, thus hedging the farmer against loss if the price of Corn drops between now and the time of harvest. 

Does that make sense?

With that said...every Futures market has a sequence of 'contract months' that you will use to trade.

Every Futures market has a scheduled date for which the current 'contract' is set to expire, which is called 'contract expiration', and at that time we must exit all of our positions on the expiring contract and re-enter new positions on the next 'contract' in the sequence. This is called 'contract rollover', which is the act of exiting positions on the current contract-month and then re-entering positions on the next contract-month in the sequence.

The most common "contract rollover" dates are as follows:

* Crude Oil Futures (CME/NYMEX) = 3rd Week of every 1 month: Jan, Feb, Mar, Apr, May, Jun, Jul, Aug, Sep, Oct, Nov, Dec

* Gold Futures (CME/NYMEX) = 3rd Week of every 2 months: Feb, Apr, Jun, Aug, Oct, Dec

* E-Mini Futures (CME) = 3rd Week of every 3 months: Mar, Jun, Sept, Dec

* Currency Futures (CME) = 3rd Week of every 3 months: Mar, Jun, Sept, Dec

Example: Trading Crude Oil Futures Crude Oil contracts expire every month, which means if I am trading the January 2014 contract (CL 01-14) I will need to 'rollover' to the February 2014 (02-14) contract the 3rd week of the month of January before the January Contract Expires.

Is there a risk to NOT rolling forward? 
Yes, and no. Your futures broker will always monitor your open position as you get closer to expiration day, and most often your broker will contact you to remind you to 'rollover' to the next contract-month in the sequence. Yes, if you do nothing you will have to take 'delivery' of the commodity, but 99.99% of brokers will prevent this from happening unless you tell them not to specifically.

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Steps to take for Contract Rollover:

- Identify which Futures market you need to rollover

- Open Ninja Trader Charting Software & Connect to the Live Market

- Open the Instrument Manager and Activate the next contract-month in the sequence for that market

- Save your workspace

- Color-Link all the charts that are using the market you want to rollover

- Change the Contract-month on one of the charts, which will also change the others that are color-linked

- Un-link the charts

- Save the workspace again

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Thanks for watching!
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