A futures contract rollover is used by traders to switch from the month which is closer to expiration into a different contract expiring in a later month. Unlike stocks, a futures contract has an expiration date. Futures are rolled over or transferred to a new month. This helps prevent the obligations and costs linked with the contract settlement. A futures contract is normally settled through physical or cash settlements.
Reasons for Futures Rollover
When you roll a futures contract, you are essentially prolonging the maturity or expiration of your initial position and using the same underlying position in order to start a new contract for a longer term. This way, the trader can retain their initial risk position even if the initial contract has passed its expiration date (this is important because a futures contract can only have limited expiration dates). The roll is usually executed shortly prior to the expiry of the original contract and after loss or gain on the initial contract is settled.
