Future Rollover Strategy
Definition of “Rollover”:
In the future, you have bought a particular month contract and the price has been low during expiry. Before settlement you can sell that contract and can buy next month contract. I.e. If you hold in the current month future, you can sell that and can buy in next month future or if you have sold current month future, then you can buy it and can sell the next month future.
If an investor thinks the future, he bought or sold will still give him more profit or holds a future position in loss, than thinking in a way he might get a profit in the next month contract they do rollover. Mostly, small investors do rollover to make over their losses.
Benefit’s of Rollover?
To recover the losses in current month future an investor can continue his position in next month future by rollover. For example, consider the price of an ITC equity be 320. Let’s assume the current month (January) future price is 322. If a trader feels the ITC price may go down and go for short in the future, but on that month expiry the ITC have raised to 330 (the equity and future will be about same price during expiry). Now ITC equity has gone 10 rupees up and ITC future has gone 8 rupees up. Here the trader will be suffering a loss of 8000 rupees. (ITC nifty lot size is 1000 *8 = 8000). To make over the loss the trader will make rollover to next month (February) contract. Now ITC equity will be trading at 330 and future at 333. The trader might close his previous month (January) contract for 330 and again he went for short in February month contract at a price of 333 and assume the at the end of February the ITC stock returns to 320 at that time future will also trade at a price of 320 so, the trader will buy the future at 320 and will close the contract. Now the profit will be 13,000 and after deducting from previous month’s loss the total gain will be 5000 for the trader. Even if the price of ITC remains same for two months with the premium in ITC future the trader have gained 5000.
In future if rollover is done for long (buy) position there is chance of loss due to premium and if the future position is continuing in a profit mode then there will not be any issue. If a trader rollover the long position suddenly the next month and the far month contract will trade at a discount price and this may be due to dividend provided for the future equity or short may be build up in the future.
What are Premium and Discount?
It will be important to notice the premium and discount while trading in future. If the future price is higher than the spot (Index, Stock) it is called the premium and if it is low then it is called discount. The traders will say whether the future is trading in premium or at a discount based on this.
Ex: Nifty spot 6250, Nifty future 6290 = 40 points premium.
Nifty spot 6290, Nifty future 6250 = 40 points discounts.
Premium and Discount Effects:
As per market experts, if the future is trading at a premium, then the market will be bullish trend and if the future is trading at a discount then the market will be bearish. 90% of the future will trade in premium. Always premium and discount will not be on the same level. Based on the market volatile it may get increased or decreased.