Rollover futures - when to be cautious

Many beginner traders underestimate the impact of futures rollover on their investments. Here are the three most common mistakes:

• Ignoring the price difference: Often, the new futures contract has a different price than the expiring one. For example, if the old contract costs 500 PLN and the new one 510 PLN, a loss of 10 PLN per unit may seem small, but with a transaction of 50 units, that’s already 500 PLN.

• Failing to adjust the strategy: Some traders continue their strategy without considering the new base price, which can lead to poor investment decisions.

• Misaligning stop loss: During rollover periods, the spread and volatility may increase, raising the risk that your stop loss may not work. For example, if you set a stop loss 2% below the current price and suddenly a gap appears, you might experience a loss of 3-4%, which with a capital of 10,000 PLN means an additional loss of 100-200 PLN.

Rollover futures is the moment when contracts expire and are replaced by new ones. This process is an integral part of the futures market, but it comes with many complications. One of the main risks is price volatility, which can lead to the formation of so-called 'gaps'. These price gaps can cause your orders to be executed at significantly worse prices than you intended. Additionally, differences in the valuations of new and old contracts can create confusion in your trading strategy if not properly accounted for.

Assume you have a capital of 15,000 PLN and entered the market with the intention of making a profit of 5%. With such capital, the planned profit is 750 PLN. However, an inattentive approach to rollover can ruin this plan. For example, if you lose 2% of the value of your portfolio due to an unfavorable gap, that’s already 300 PLN. Now imagine additional costs resulting from an expanded spread. If the spread increases by 0.5% of the value of your portfolio, you have another 75 PLN loss. In total, that’s 375 PLN, which means half of the planned profit has evaporated due to rollover-related mistakes.

To avoid errors related to futures rollover, it is worth taking a few specific actions:

1. Monitor the calendar: Make sure you are aware of the rollover dates for the contracts you are trading.

2. Revise your strategy: Update your trading parameters, such as stop loss and take profit, in relation to the new contract.

3. Stay flexible: Be prepared to change your investment plan if market volatility increases significantly.

4. Track price differences: Compare the prices of the expiring and new contracts to adjust your actions.

5. Be cautious on rollover day: Avoid making large transactions on rollover day when volatility and spreads may be the highest.

Check the rollover calendar every week to stay updated.