Professional Handling Of Contract Rollover

This is an important article, because it’s something that I guess, in my old years, I tend to take for granted, but it’s amazing. This is something that I saw recently with contract rollover and I wanted to share it for your benefit. Basically, what I saw was several new student family members that are new to my methodologies, but not new to trading, asking the question when and how to rollover. They say,“Rob, you’re in the December contract, you’re supposed to be in the March contract.” So it was a great topical piece first thing this morning.

What I want to do right off the bat is just explain something important to you. I understand that your charting packages often will automatically roll you over to the new front month. Your brokers will also send you emails encouraging you or telling you to go ahead and move over into the new front month. But I will tell you, volume and liquidity are key survival tools and mechanisms and needs that we have as traders. So one of the things that I do with my trading is I always make sure that there’s more volume pushing into the new front month than the old one.

So, for instance, what you will see in the video above is a snapshot of the SNP futures. And you will see  it’s about 1:42 central time, so 2:42 eastern time when the snapshot was taken, so there was still got some time left in the market on that day. But this is a day that we were supposed to rollover, first thing this morning. That’s what our brokers tell us to do, that’s what they encourage us to do. Our charting packages have already rolled over, front month to the March contract. So everything we receive as traders says to us “Hey , we should be in the March contract.” I will tell you right now that the way that I handle this from a professional perspective and that tends to make the most sense for most people is to throw up a volume chart of the prior month and the new month.

So, in this case, watch the video above and see that I have the SNP December contract, and then I have the SNP March of 2013 contract What I do, is that I take a 5-minute chart and I compare these two 5-minute charts with each other.  If you want to do this,  all you have to do is put your little cursor on the front time, and see what they’re doing. What you’ll notice in the example above is that –we had 16,500 contracts being traded in the December contract with only 6,500 contracts approximately in the March contracts. So just shy of a 3:1 ratio. There was more volume still in the December contract.

Now, in this example, with an hour and 15 minutes in the cash session still to go, we’re seeing about 5,100 contracts being traded in the SNP December, and 2,600 now being traded in the March contracts. So we still have even a 2:1 ratio. Now of course, what you want to do is you want to wait till this bar closes, just to verify this, to see exactly where they settle out each bar. Because what you’ll see is some more volume sometimes creeps into the front month still, the prior month, the December contract in this case. Wait till the bar closes, and then do the reading.

Once the volume in the March contract starts showing those 5-minute bars locking in more volume in that new front month, in March of 2013 in the case of the example in the video above, that’s when I’m going to go ahead and make the switch.

So this is how I handle every single rollover. This is how I manage  the gold, the crude oil. I’ll do the currencies the exact same way. It’s very important: this way, what I’m doing is I’m keeping as much liquidity in my favor as possible. And, of course, that’s very important for someone like myself who trades big contract size, but it’s also important even if you’re a one or two contract trader because obviously you’re more prone to slippage and whipsaws back and forth in a lower-volume environment.

This is a very important topic. It happens, , depending on the instruments you trade, once a month, once every other month, once every quarter. So it happens frequently, and  it’s something you need to be aware of. For all traders, I hope you enjoyed this update and get a live snapshot here of how I actually control the rollover process.

Leave a comment!
Read previous post:
Set Yourself Apart by Staying the Course

I came across an interesting article this week that I wanted to share with you.  I think the content is...

Close