Futures Contract Rollover – When to switch and why it gets volatile.
Futures are contracts that speculate on the future price of an asset. These contracts have an expiry date, and are similar to options in many ways.
The key difference between futures and options is that on expiry you are obligated to buy or sell the underlying asset.
When a contract approaches expiry, traders that wish to extend their current position will need to sell the closest expiry contract (called front month) and buy the next one out in time.
This process of rolling your position forward is called the futures contract rollover.
Futures Contract Rollover – When does it occur for the SP500?
The SP500 index futures are some of the most liquid contracts in the world. There is a lot of average daily volume and the liquidity is very deep.
As you approach the expiry month investors, traders and portfolio managers need to all make trades.
Contract rollover creates volatility and unexpected movements as a result.
The SP500 futures expire the third Friday of every calendar quarter.
The futures symbol for the SP500 index is “ES”.
Every quarter there is an additional letter tacked on to the end:
March expiry – “H”
June expiry – “M”
September expiry -“U”
December expiry – “Z”
The way I remember it is to call the codes humus. HMUZ = humus.
Futures Contract Rollover – Contract Month Codes
When you are trading futures you must remember that every contract has unique specs.
Some expiry monthly, others quarterly. The month they expire is coded with a letter.
Here is the full monthly table:
If you want to check the full contract specs, the CME website is a great resource.
Here is an example of the different contracts on Trading View:
You can see from above that these contracts trade well into the future. Hence the term, futures. :)
Futures Contract Rollover – The Money Switches the Week Before
Now you know when the SP500 index futures officially expire.
But when do you stop trading the current contract and switch to the following contract?
The general answer is whenever volume switches over, you should too.
Trading in the SP500 index futures switches to the following month on the Friday before contract expiry. So on Friday June 9th of 2017, volume will start to move over to the September contract.
One easy way to know the shift is happening is to compare the two contract volumes.
Today, Thursday June 8th the volume is as follows:
ESM2017 – JUNE – 1M contracts
ESU2017 – SEP – 636k contracts
You can easily see that volume started to move over to the next month contract today.
Tomorrow you can expect the majority of the volume to trade on the Sep contract.
I hope this helps you gain an understanding of what futures contract rollover is and why it causes volatility.
I urge you to be cautious during these rollover Fridays as they ca be choppy and full of head fakes and whipsaws.
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