What Is Rollover

The life of a future is of maximum 3 months. All the near month contracts on Futures & Options expire on the last Thursday of the respective month. However, the participant who would like to continue holding on to the positions would take the same position in the next series, closing down the existing position at the same time near the expiry. This activity is termed as Rolling Over the position. The observations from RollOver indicate the extent of interest in the market taken into forward into the next month. Looking a little deeper one may have takeaways in terms of the sectors & stocks that the participation is paying attention to; hence one may await action in the same in the coming expiry.

When and How to Rollover?

In India, equity derivatives expire on the last Thursday of each month. So rollovers can happen till the close of trading hours on that day. Most rollovers begin a week before expiry and end till the last minute. Usually, contracts are rolled over to the next month.

How Does Rollover Works?

How does the rollover mechanism in the stock market function? A more precise question might be, “When or how do rollovers occur?” Once you understand the basics of a rollover, the answers to these questions become clearer.

In India’s stock markets, equity derivatives have an expiry date, typically falling on the last Thursday of each month. A rollover can happen anytime before the trading session ends on this day. Most rollovers, however, begin around a week before the futures contract expires and can continue until the last moment on the expiry date. These contracts are then “rolled over” to the next month.

How to Interpret Rollovers?

Rollover numbers don’t have a definite benchmark but are expressed as a percentage of rolled positions to total positions. While some analysts may note absolute changes in rollover quantities, the standard practice is to compare a rollover percentage with its trailing three-month average. For example, in the rollovers from April to May contracts, Nifty futures had a rollover of 56.95%, up from the three-month average of 52.15%, indicating slightly stronger sentiment. Rollover is a quick measure of investors’ willingness to bet in the market.

So lower-than-average rollovers are an indication of cautiousness while high rollovers indicate a strong sentiment. Accordingly, any imbalance in long positions or short positions indicates the direction the market is betting on. Analysts also interpret rollovers on the basis of costs. For instance, a trader, while rolling over a position, may enter into the next month’s contract at a premium or discount to the underlying value. In other words, the rollover could happen at a high cost of carry, which would then indicate the degree of bullishness.

How to Access Rollover Data?

Unlike trading data, rollovers are not distinctly captured by exchange websites. Instead, analysts interpret rollovers by calculating and grouping large amounts of trading data.

Rollovers in Futures

Rollover in futures refers to the process of extending the expiration of a futures contract by closing the current contract nearing expiry and simultaneously opening a new contract in the next expiry month. In the Indian stock market, futures contracts generally expire on the last Thursday of the month. Investors often roll over their positions to avoid taking physical delivery of the underlying asset or to continue their investment without booking a profit or loss.

Rollovers typically occur a week before the contract expiry, and most rollovers happen right up until the expiry day. This process allows traders to carry their positions forward to the next month while maintaining exposure to the same asset. Rollovers are commonly used by institutional and retail investors who seek to manage positions for the long term without closing out their trades. However, it is important to consider transaction costs and potential slippage when executing rollovers.

Are There Rollovers in Options?

Rollovers are possible only in futures. This is because it is mandatory for futures to be settled at expiry, whereas an option may or may not be exercised. Options are not entirely out of the picture, though. Some traders confirm their interpretation of a rollover by checking changes in the implied volatility (IV) of options of a similar expiry. A high IV along with a strong bullish rollover is said to strongly indicate positive sentiment.

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