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Futures Roll-over – How it works

Our clients who trade Spread Bet and CFDs often seem rather perplexed around this time because the Futures are rolling over and all the talk is of “expiry”, “triple witching”, “quadruple witching”, “roll-over”, “new front month”, “rolling off the board”, “options expiry” and the like.

The Spread betting firms have simplified things over the years so you can trade something like the FTSE on a “rolling” basis; basically replicating the Index, or the “Cash” as it’s known in market parlance. So why do the Pro traders all trade the March, June, September or December Futures? What’s that all about?

By definition “Futures” are trade-able instruments that are priced depending on where the market thinks an instrument will be at some time in the future. The traditional set of expiry months for these sort of contracts has been March, June, September and December. You will find that Commodity markets are different. This is mainly to do with seasonal differences, so people can trade the crops that are about to be harvested or have just been harvested.  Saying that I’ve never understood the logic behind the Precious Metals expiry cycle so if anyone ever wants to enlighten me please feel free!

Anyway, as we write the March FTSE Futures are very close to expiring, getting to the end of their life. Futures traders who want to bet on or hedge future price movement therefore need to “move down the curve” and trade the June expiry, which is a bet on where the FTSE Index will be in mid June. The March contract is therefore “rolling off the board” and anyone who wants to keep their exposure to the market has to get out of the March position and move their interest into June. They are “rolling over” their position.

If you were to hold your Futures position into the expiry the exchange will demand that you do something to settle your contract. Many Financial Futures instruments are cash settled, so you just pay an amount of money, or (hopefully) receive an amount of money, depending on where you got in versus where the contract settled on the Expiry day. This is why there can be a big mash up in the minutes before the settlement of any contract. Futures exchanges have taken several measures over the years to calm the volatility at these times, as there have been lots of incidences of what could be described as market abuse during Futures expiries in the past.

So much so that the expiry days have taken on an almost mystical aura amongst market participants. The hour when everything expires has become known as the “Witching hour” and when you get expiry of more than one instrument it is called “Triple Witching” or even “Quadruple Witching”.

Triple Witching is when the Futures, Options, and the Single Stock Options all expire on the same day. It can cause havoc, but as I mentioned the exchanges have worked hard over the years to iron out any foibles thrown up, all in the name of keeping an orderly market. With the increased use of Single Stock Futures these can also be thrown into the equation to give you a “Quadruple Witching”.

Anyway I digress. Let’s get back to settlement of these instruments. As mentioned many contracts are “cash” settled, but some are settled with physical delivery. In Bond markets a holder of a Long Position in the Futures has to pay up the full price (forget margin at this point!!) to receive a lump of Bonds. In Commodity markets a holder of a short position in, say, Corn, would have to delivery a set number of bushells of Corn to a specified warehouse on a specified date in a certain condition. So speculators are usually pretty keen to “roll-over” their interest and not end up in this situation! I always remember working for a Broker on LIFFE and they were always very concerned on Expiry day that we didn’t have any errors that might result in having to physically delivery something they physically didn’t have!

So around mid morning on Friday if you see the markets wobble, pick up in volatility, or make a sudden unsuspected move, you now know why: Roll-over. The Witches at play!!! From this moment on the Futures traders are all looking at a new instrument; trading the June Futures, until the next roll-over.

We always suggest to our Spread Bet or CFD clients that they trade the market that tracks the Futures. for starters this is what we are analysing on a daily basis, so it is the truest reflection of what’s actually going on. Also the Futures are open (in the case of the FTSE) from 8am til 9pm every day, so you always have a “real” market price to reference off.

If you haven’t had a Free Trial of our reports before why don’t you try us out? We have been used by Professional traders for 10 years now, having first started writing our reports when the LIFFE Floor closed its doors in 2000. In fact FuturesTechs is celebrating it’s 10th birthday at the start of April.

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