How to Carry Forward Winning Trades:
Rollover of a futures contract and the
benefits of a calendar spread
While trading or investing in a systematic
manner. Many professionals use the
future and options as they go to various
instruments to make money. Future
and options is a multiverse of too
many strategies and opportunities,
it all depends on your forecast and
understanding of the market sentiments.
Some strategies can even give you money
when you are partially incorrect with the
understanding of the market. Especially
if you are an option seller, you can make
money by virtue of the time value decay.
However, this one is not about options
but understanding the benefits of
rollovers of future contracts and
understanding when and how to
execute that. The world of options
and futures are very creative and
fascinating. To some, it may be
mind-boggling, to others it may
work great as a way of generating
a steady cash flow over a time horizon.
The index futures like the scrip for
bank nifty are one of the most traded
instruments. It is very important to keep
the risk managed and hedged properly.
While trading in index futures many
choose to roll over their contract.
This is a smart way to limit risk and
create the opportunity for being right
with your technical analysis of the market.
To understand this concept, first, let us
understand what entails a futures contract.
What tracks the prices of a contract and
how is it taken into account. Usually, when
a contract expires, the job of the clearing
house and the exchange should match the
buyer and seller of the contract. In commodity
markets, this may take the form of physical
settlement, however, such is not the case
for the financial markets. A simple way of
carrying forward the position is to close
the current month contract and buy the
near month contract. The buy could be a
short or a long position, the activity will be
termed a rollover.
What is the meaning of rollover and
how does it apply to the stock market?
Rollover is a market activity that is carried
out by various investors or professional traders.
Hedge funds, foreign portfolio investors, and
any big ticket size trader would definitely be
aware of this as this is the most common way
of carrying forward their position. The way how
a contract can be squared off depending on
the market.
As a trader, always maintain a trading journal
for getting effective insights into your psyche
and the trades that you have taken.
The future contracts can be held in the
same position if the market sentiment
does not change drastically against the
initial position held by the trader. If a
the trader has entered the position with a
particular viewpoint and the same has
remained right through the end of the
current month, then it is better to roll
over and keep on the right side of the
trend. The best part about the futures
is that there is no time decay, and there
is no worry when it comes to understanding
the greeks or other parameters while
making the position. The futures contract
simply moves by the virtue of the underlying
asset and the market volatilities. It is good to
take advantage of it. But, the right understanding
of the strategies and the market is crucial to
have success in such strategies.
There are various advantages of trading in
future contracts. It is known for its liquidity,
stable margin requirements, and
easy-to-understand strategies.
All kinds of investors who are looking for a
stable return and a relatively less risky asset
always look into futures as compared to options.
Always keep in mind to cross-check the open
interest and the prices of an asset to make sure
that you analyze the market correctly and take
the position on the right side of the trend.
Remember no matter how much you think
you are strong in theories, it is difficult to study
the market without the right technical tools and
experience the market. Try and give time in the
market to understand it better first before making
a move that may result in the loss of capital
and confidence. Investing is always subject
to market volatility and risk. So do your own
due diligence.
If an investor or trader is not really a
professional chartist or a market timer,
the person is better off investing in a
fixed return instrument or following a
financial advisor’s assessment.
Analysts have no emotional lookout
for the market and would often
do things that many would fail to understand.
Remember to have side hustles like
referral income from sites like this.
Simple errors in the market can be improved upon and eliminated by following a trading journal.
Futures contracts track the prices
of the underlying market. A futures
contract is where a buyer and seller
agree to initiate a trade as per the
contract size, price, and future date of
delivery for the contract. Most traders
in today’s market hedge against market
exposure rather than taking physical
delivery of the asset.
The analyzing power goes a long way
in making the career of the trader. Many
still choose to trade exchange-traded
funds for added flexibility and participation
in the market. While such attempts may
bring a lot of confidence, the actual risk
involved in these kinds of instruments is
relatively lesser. An investor may still find
it is extremely difficult when it comes to
trading in the live market with their real
hard-earned cash.
Remember that traders who choose to
play during the rollover may sometimes
face issues such as slippage costs.
Three are many hidden costs or factors
that affect the possibility of creating money
from the market. If there are day traders
in the midst of this rollover they might face
significant volatility in prices.
The bid and ask prices may fluctuate so
much that they could either end up eroding
capital or giving good returns in the end.
It all depends on what basis the rollover
is chosen by the big sharks of the market.
The trading volumes and the tick of the
prices may seem high deviation due to
the sudden volume spike during the day.
Some experienced day traders would want
to use such opportunities to their benefit and
make some quickly profitable scalps along
the way. This is risky and many have burnt
their fingers trying to play a gamble on
such opportunities.
It is good to check when the volume
switches over to the next month, to make
the right decision on the future rollover.
Traders often check the open interest
build-up and differences. A good difference
will tell you the story of the rollover and
the overall position of the big players.
Open interest is a smart way of analyzing
when to roll over from a contract. As a thumb rule,
many traders would switch contracts when
the newer contract has a higher open interest
than the one at present. When the majority of the
traders have shifted their position in the next
month's contract, that’s the time when smaller
retail investors also do the same the right way.
Remember to swim with the tide and not against it.
Calendar spread
Some traders want to play the strategy
based on the price spreads between various
strike prices. In such cases, a calendar spread
may also be employed as per the market situation.
A calendar spread refers to a strategy in which
two separate positions are made simultaneously
for the same underlying asset. It happens when
a trader enters a long and short position with
different delivery dates of the same underlying
asset. This is an interesting case that should be
kept in mind while knowing about the
rollovers and the opportunities of carrying
forward your positions. Though these are
two separate strategies for two separate
occasions, the context is quite the same
using the time to your advantage along
with the current view in the market.
Margin Trading, Deep OTM & ITM
can be profitable as well as capital
eroding in nature.
When one buys a longer-dated contract
and shorts a shorter-date contract,
it results in a calendar spread.
Such a strategy works wonders
when one is sure that there won’t be
a highly volatile scenario until the
contract of the far month expires.
Minimizing the effect of time through
this kind of strategy is quite a good
way to manage risk and create
opportunity.
A trading journal helps in understanding why your trades went right
It is important to remember that there
are some common mistakes made by
traders in this strategy. Try to avoid these
with a basic understanding of the strategies.
The idea of this strategy is to make money out
of the effect of time and the volatility or the
vega of an option. Remember the theta decay
or the time value of an option is at the highest
when it is near the expiry. An increase of IV or
implied volatility is good for this strategy.
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It is better to choose a strike price that is pretty
much near the current price of the underlying
asset. Remember in the case of a debit spread,
the maximum loss is the amount that has been
paid at the time of initiating the trade.
Books like this might help you in this process.
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