Contango = repeated rollover costs eat into profits. Each month you "pay" the premium.
Backwardation = rollover credits accumulate. You gain each time you roll.
For Short-term Traders:
Rollover is a once-a-month event. Less impact if you exit before expiry.
Watch rollover days (typically 3–5 days before expiry) for increased volatility and spread widening.
Key Tactical Point:
On rollover day, liquidity shifts from the current month to the next month contract. Spreads widen, slippage increases. Professionals roll early (5–7 days before expiry) to avoid this.
Imagine you rented a video game for June. June is ending, but you still want to play. So you return the June game and rent the same game for July. If the July rental costs ₹10 more than what you paid for June, that extra ₹10 is your "rollover cost"—the price of continuing to play without a break. In futures, you're "renting" a price bet for one month. When the month ends, you swap to the next month's bet to keep your position alive.
Margin and Leverage – why you need futures instead of holding cash
Marking to Market – daily settlement vs. monthly rollover
Cost of Carry Model – theoretical basis for contango/backwardation
Calendar Spread Trading – exploiting rollover spreads as a strategy
#flashcards/stock-market
What is rollover in futures trading?
The process of closing a position in the expiring contract and simultaneously opening an equivalent position in the next month's contract to maintain continuous exposure without settlement.
What is rollover cost?
The price difference between the expiring contract and the next month contract, multiplied by lot size, representing the cost (or gain) of maintaining your position.
Formula for rollover cost for a long position
(Fnext−Fcurrent)×N where N is lot size.
If Nifty July futures trade at 24,500 and August at 24,620, with lot size 50, what is the rollover cost for a long?
(24,620−24,500)×50=120×50=₹6,000
In contango, who pays rollover cost—longs or shorts?
Longs pay (next month is more expensive). Shorts gain (they cover cheap and re-short at higher price).
Why can't you just hold through expiry to avoid rollover?
Cash-settled contracts auto-close at settlement (you're out). Physical delivery requires full capital and defeats leverage purpose. Rollover is mandatory to stay in the trade.
What is backwardation?
A market structure where the next month futures contract trades below the current month contract, opposite of contango.
When should you roll your position to minimize costs?
5-7 days before expiry, when liquidity is still balanced. Avoid the last 2-3 days when spreads widen.
Rollover aur Rollover Cost ka practical matlab kya hai?
Dekho, futures contract ek fixed time period ke liye hota hai—usually ek mahina. Jab wo month khatam hone wala hota hai (expiry aa rahi hai), tumhare pas do options hain: ya to settlement kar lo (position close kar do), ya phir rollover kar do. Rollover ka matlab hai ki tum apni current month ki position ko band kar ke exactly same position next month mein le lo. Aise tumhari trading position continue rehti hai bina physical delivery liye.
Ab yahan trick hai: rollover cost. Jab tum current month sell karte ho aur next month buy karte ho, usually dono ki price different hoti hai. Agar next month zyada expensive hai (contango), to tumhe extra paisa lagana padega—that's your rollover cost. Stock market mein mostly contango hi rehta hai kyunki carry cost (interest, dividends) factor in hota hai. Lekin kabhi-kabhi backwardation bhi ata hai (next month sasta), tab tumhe rollover pe profit bhi ho sakta hai. Ye samajhna zaroori hai kyunki agar tum long-term futures trader ho, to har month ye cost tumhare returns ko kha jati hai. Smart traders apna rollover 5-7 din pehle kar lete hain jab liquidity achi hoti hai aur spread tight rehta hai.
