Rollover

A futures contract has a death date. On the expiration day it ceases to exist and all open positions are compulsorily settled by the exchange. There is no option to keep holding.

So a trader who still wants the exposure has to rebuild it in the next contract. That is a rollover: sell the expiring contract and buy the next one, for a long position; buy back the expiring one and sell the next, for a short. The workbook adds the operational instruction that makes it a rollover rather than two trades — both sides of a roll over should be executed at the same time.

One moment of being unhedged between the two legs and a roll stops being a roll and becomes a naked directional bet.

The mechanics are fixed by the contract cycle. Index and stock futures on the NSE follow a three-month cycle, so on any day the near, next and far month are all available. A new contract is introduced on the trading day following the expiry of the near-month contract, which keeps three series alive at all times.

The cost of the roll is the spread between the two contracts — the difference between what the expiring one fetches and what the next one costs. Since the expiring contract has converged on the spot while the next still carries a month of cost-of-carry, the far contract normally trades higher in a contango market, and the long has to pay up to stay long. That spread is the recurring price of holding a leveraged view indefinitely, and it is exactly what a calendar-spread trades directly.

Rollover data is also read as sentiment. High rollover into the next series says positions are being carried rather than abandoned, which the market takes as conviction.

Expiry days are now regulated. Exchanges may choose either Tuesday or Thursday as the expiry day, applied uniformly to all their equity derivatives, and a change requires prior SEBI approval. Each exchange may offer weekly contracts on only one benchmark index, and everything else must carry a minimum one-month tenor.

Roll spread = Price of next-month contract − Price of expiring contract

Cost of the roll (long position) = Roll spread × Lot size × Number of lots

Realised P&L on the expiring leg =
    (Settlement price − Entry price) × Lot size    (long)

A trader is long one lot of Nifty October futures at 25,006.60, lot size 65, and wants to stay long into November. October expires on 28 October 2025.

On expiry day the October contract settles at 24,950 and the November contract is quoted at 25,080. He executes both legs together.

Leg 1 — close October:

(24,950 − 25,006.60) × 65 = −Rs 3,679

A realised loss, crystallised whether he likes it or not — the exchange was going to settle the contract anyway.

Leg 2 — open November at 25,080:

Roll spread   = 25,080 − 24,950 = 130 points
Cost of roll  = 130 × 65 = Rs 8,450

What the roll actually did. He walks into November long at 25,080 having entered October at 25,006.60. His effective entry has risen by 73.40 points, and the position has cost him

Rs 3,679 realised + Rs 8,450 of spread = Rs 12,129

against a contract value of about Rs 16.3 lakh — roughly 0.74% for one month, or close to 9% a year if he rolls every month.

That annualised figure is the point. A futures position is not a share: held long enough, the rolls compound into a carrying cost that has nothing to do with whether the view was right. A trader who was correct about direction over six months, and rolled six times, has paid away most of a 9% annual drag before the thesis is even scored. Leverage is rented, not owned.

Chapter 15 (contract specifications) covers the expiration day, compulsory settlement, the three-month cycle and the instruction that both sides of a roll be executed at the same time; the same section carries SEBI's uniform-expiry measures. Expect a question on what happens to an open position on expiry day — it is compulsorily settled — and on how a position is carried forward.

• Rollover is two trades executed together, not an extension of one contract. Nothing about the original contract survives its expiry.
• Both legs must go on simultaneously. Sequential execution leaves a naked position between them, which is the risk the workbook warns about throughout Chapter 17.
• A roll crystallises the profit or loss on the expiring leg. It does not defer it.
• The roll spread is a real, recurring cost. Annualised, it can exceed the return the view was meant to earn.
• Expiry days are exchange-specific and have changed. The workbook shows Nifty and Bank Nifty on the last Tuesday while an older Chapter 15 example uses a Thursday, and Sensex contracts expire on a Thursday. Exchanges may now choose either day uniformly, with SEBI approval.
• Only options are rolled the same way in principle — but an option roll changes the strike as well as the expiry, so it is a new position in two dimensions, not one.