Rolling Contracts

Rolling contracts is the process of closing a futures position near its expiration and opening a new position in a contract with a later expiration date. This allows traders to maintain their market exposure indefinitely.

The cost or profit from rolling depends on the shape of the term structure. In contango, rolling is expensive because the trader sells a cheaper near-term contract and buys a more expensive long-term one.

In backwardation, rolling can be profitable as the trader sells a more expensive near-term contract and buys a cheaper long-term one. This process is essential for long-term holders of futures positions.

Traders must account for the impact of rolling on their overall portfolio return. It is a key consideration in commodity and crypto index fund management.

Automating the rolling process can help minimize slippage and transaction costs. Understanding the cost of rolling is vital for evaluating the performance of derivative-based strategies.