Rollover Risk

Rollover risk is the potential for financial loss or increased costs incurred when a trader moves a position from an expiring contract to a new contract with a later expiration date. This process, known as rolling, requires closing the current position and simultaneously opening a new one, exposing the trader to the difference in price between the two contracts, known as the basis.

If the new contract is more expensive, the trader pays a premium, often referred to as contango. Conversely, if the new contract is cheaper, the trader may benefit, a state known as backwardation.

This risk is particularly prevalent in leveraged derivative trading where market liquidity can thin out during the transition, potentially leading to unfavorable execution prices and slippage.