What is rollover? (investments)

Rollover is a process that allows a contract to extend its expiration period. Rollover is the simultaneous transition from one contract to one with a longer expiration date.

 

Rolling in practice

For a trader trading stock futures, contract expiration is almost a primer. On a regular basis, the upcoming series of index contracts and options, and stock contracts expire every three months.

If a given investor is interested in maintaining a position on a given option or futures, then in many cases he or she will have to switch to their next series – at the same time closing a position on a given instrument and opening one in a similar account with a new expiration date.

This mechanism of action is called position rollover.

What does forex rollover look like?

It is definitely simpler. The rolling of forex contracts for difference in most cases is carried out automatically – without the participation of the trader. The transaction is then directed by the broker, who keeps an eye on the relevant dates.

How often does it occur?

This depends on several factors, but primarily on the expiration dates of the underlying instruments, i.e. the exchange-traded futures contracts that are used to price a given CFD.

They usually occur on the third Friday of the month, every quarter. Oil and European index contracts are rolled over once a month.

How does one avoid the turmoil associated with pricing?

When the rollover is carried out automatically, depending on the price difference on the contracts of the expiring and the next series, the account is debited or credited with a certain amount. As far as liquid instruments are concerned, these are usually not large amounts. Instead, investors risk incurring some loss at expiration.

There are FOREX brokers who swap a series of CFDs a day before the expiration of the underlying contracts listed on the exchanges. This reduces the turbulence associated with investors’ operations.

Rollover, and the foreign exchange market

Here the mechanism works a little differently. The swap of positions is necessary due to the difference in interest rates of the currencies present in the pair.

Customer positions opened in the foreign exchange market are therefore automatically rolled over Monday through Friday before midnight. If the client leaves the position open for the next day then his account will be credited or debited with swap points, as specified in the swap points table. This is the broker’s cost of holding the position in the market.