One of the most interesting aspects of futures trending is rollovers. The concept can be used to great advantage, however, there are some differences when you are considering futures vs. stocks rollovers. The purpose of a rollover is to transition from an expiring futures contract to a new contract to maintain exposure to the underlying asset. It also helps avoid disruptions in your trading positions. However, they carry some risks and there are associated costs that go with rollover transactions. The key is to make good decisions that weigh both the possibility of profit and the translation costs involved.
Calendar Spreads
A calendar spread involves simultaneously entering a long and short position with futures contracts for the same underlying asset. You will also have different expiration dates. By doing this, you are protecting yourself against volatility. The calendar spread is the difference in price between the end of the contract month and the months to which you are rolling over. When you roll over, you will avoid paying the costs associated with settling the contract.
Contract Selection
Consider how liquid the expiring and new contracts are. You should opt for contracts that have higher trading volumes and narrower bid-ask spreads to minimize transaction costs. This is the difference between the bid price and the asking price of an asset. You save translation costs because if the bid-ask spread is too big, it may end up cutting into any profits you make on the deal.
Timing
Make rollover decisions well before the last minute. As the expiration date comes closer, bid-ask spreads usually widen, meaning you’ll have higher transaction costs. Making a decision sooner helps to avoid those costs, and also locks in a favorable price. Plan in advance by analyzing market conditions and the liquidity of the asset so that you can execute the trade at an ideal time.
Fees and Other Costs
Keep an eye on things like brokerage fees and commissions. There may also be trading fees associated with rollovers. Shop around for different brokers and trading platforms to find an option that is the most cost-effective for you. You can also use different trade execution techniques to lower costs, such as using limit orders to control the execution price and reduce slippage.
Data Analysis
You can also analyze historical data to evaluate how different rollover strategies have accumulated transaction costs in the past. You can look at patterns and trends that will help you make smarter rollover decisions. The good thing about this is that you will look back and see how beneficial those trades were, so you can balance the costs against the profits.
Stay Informed
You want to stay informed and updated on market conditions, geopolitical events, and economic events that may affect the underlying asset that you are considering rolling over. This will help you anticipate changes in the market, and predict whether it’s a good idea to roll over or go into a short position. Being well-informed allows you to adapt your strategy in the face of changing market dynamics.
Risk Management
There are several risk management techniques you can use to minimize losses and manage your position sizes. While this won’t affect transaction costs, it will make your losses more bearable, which will protect your capital. Setting stop-loss orders might be the most valuable tool because then you can ensure that you don’t overextend your position. Having a diverse portfolio is also crucial to have the security to make prudent and smart rollover decisions.
When you are considering rollovers, you want to consider how much profit you will make. However, transaction costs can eat into your growth, so you should do what you can to minimize them. Use these tools and techniques to lower the costs associated with rollovers and other transactions so that you can enjoy a bigger share of profit.