We have entered the rollover period, and the lead contract in the equity Futures is now March. The December Futures will cease trading at the close next Thursday and will be settled on the special open Friday morning. A trader with a position on in the Futures can do nothing and the position will settle to cash based upon next Friday’s special open. A trader can also close out the position any time before the close on Thursday. This segment though will explore the third choice. Many traders will want to keep their position. The way to do so is through rolling. How should one roll positions in equity index Futures?
The difference between the front month Futures and a back month are attributable to interest rates and dividends. When the cost of interest is higher than the dividends paid out by the stocks in the index the back months will be higher in price than the front months. Interest rates have risen recently but their cost is still lower than the dividend so the front months are higher than the back. The best way to roll the e-mini is with a Futures Calendar Spread. Unlike other Futures, whatever you do with the back month is what you are doing on the spread. A trader long the Futures will want to buy the spread and vice versa. This will close out the old position and establish a new one. There is no real change in net liquidity.
A huge advantage exists in entering the order as a spread. The spreads for the /ES, the E-Mini S&P 500 Futures, trade as a spread. There is huge liquidity in the spreads and the minimum tick size is only 0.05 (instead of 0.25). There is no reason to try and leg the spread. Some Futures, such as the Russell (/TF) do not trade as a spread and then legging the spread is necessary. Generally, the best way to leg the spread is to place an order to exit your current position and when filled immediately establish the new position. The longer one waits before the contract ceases to trade, the less liquidity there will be in the expiring contract. The formula for calculating Fair Value was displayed and explained. This is the same calculation that determines the spread between the months.
For more information on Rolling see:
Closing The Gap Futures Edition from June 12,2015: "Rolling Futures"
Best Practices from March 10,2016: "Rolling /ES Futures"
Watch this segment of Closing the Gap - Futures Edition with Tom Sosnoff, Tony Battista and our Futures exppert Pete Mulmat for the Fair Value formula, the important takeaways and a thorough understanding of how and why to roll stock index Futures.
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