Every futures contract has an expiry date. If you want to continue holding your position beyond expiry, you need to close your current contract and open a new one in the next month. This is called a rollover.
How does it work?
Say you are holding a Nifty January futures contract and want to keep your position open into February. You would:
- Sell your January contract to close the position
- Buy a February contract to open a fresh position
Both legs are usually done together so there is no gap in your position.
Is there a cost to rolling over?
The next month’s contract usually trades at a slightly different price than the current one. This difference is the roll cost. If the February contract is trading higher than January, rolling over will cost you a little more. If it is lower, you may benefit from the roll.
When do traders roll over?
Most traders roll over in the last few days before expiry. You will notice volumes in the current month’s contract drop while the next month’s contract picks up. This shift is what market participants track as the rollover percentage.
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