Square off
Also written Squaring off a futures position
Closing an open futures position before expiry by taking the opposite trade — a buyer sells, a seller buys — locking in the profit or loss without waiting for the contract to settle.
In plain language
A futures position does not have to be held to expiry. It can be closed early, whenever the holder wants, by simply doing the opposite trade in the same contract. That closing trade is called a square off.
A square off is not the same as a rollover. Squaring off ends the exposure entirely. A rollover closes the current month's contract and simultaneously opens an equivalent position in the next month's contract — the exposure continues, just under a different expiry.
How it works
The workbook lists this among the key points about futures (Chapter 20, section 20.1): "Future positions can be offset by taking an opposite position (Square off)." A trader long 5 lots squares off by selling 5 lots of the same contract; a trader short 5 lots squares off by buying 5 lots back.
Rollover is a related but distinct action: "closing the current month's position and taking the position in the next month's contract" — expressed as a percentage of total open positions, and typically compared against a trailing three-month average rollover rate. A lower-than-average rollover is generally read as market uncertainty; a higher one signals stronger conviction that the position, and the momentum behind it, should continue.
A worked example
A trader buys 10 lots of a single bond futures contract at Rs 100.00 on 3 August, planning to hold the position into September expiry.
By 20 August the price has risen to Rs 100.75 and the trader decides to lock in the gain rather than wait for expiry. She squares off by selling 10 lots at Rs 100.75:
Profit = (100.75 − 100.00) × 10 × 2,000 = Rs 15,000
The position is now fully closed — she carries no further exposure to this contract. Had she instead wanted to keep the same directional bet running into the next contract month, she would have rolled over: sold the August lots to close them, and simultaneously bought an equivalent number of September lots, keeping her market exposure alive rather than ending it.
Why NISM asks about it
Chapter 20 (Exchange Traded Interest Rate Futures), section 20.1, lists squaring off alongside rollover as basic position-management terms every futures participant needs. Expect a question distinguishing square off (position closed) from rollover (position continued in a new contract month).
Common exam traps
- Square off closes the exposure; rollover continues it in a new contract month. They are opposite in intent even though both involve an opposite-side trade in the expiring contract.
- Squaring off does not require waiting for expiry — it can be done at any time the position is open.
- A cash-settled contract squared off early realises only the price change to that point, not the full move that might occur by expiry.
- Rollover is measured as a percentage of open positions, compared against a trailing average, not as an absolute number of lots.
Check yourself
1.Which style of option can be exercised only on the expiration date?
- a)American
- b)European
- c)Bermuda
- d)Asian
Show the answer
Answer: (b) European
"European options can be exercised by the buyer of the option ONLY ON THE EXPIRATION DATE." American options can be exercised any time on or before expiry, and Bermuda options only on specific days before expiry, falling between the two. Note that European style restricts exercise, not exit: exchange traded options can still be sold in the secondary market to square off.
2.An option contract allows the holder to exercise only on certain specified days before expiration, usually close to the expiration date. What style of option is this?
- a)European
- b)American
- c)Premium style European
- d)Bermudan
Show the answer
Answer: (d) Bermudan
"BERMUDA options: Bermudan options are different from both American and European options. The contract for a Bermudan-style option denotes SPECIFIC DAYS BEFORE EXPIRATION on which the trader can exercise his option. The specified exercise dates are usually NEAR THE TIME OF THE OPTION'S EXPIRATION DATE. Thus, Bermudan options fall IN BETWEEN American and European options in terms of how much freedom a trader has to exercise the option."
Why the others are wrong: (a) "European options can be exercised by the buyer of the option ONLY ON THE EXPIRATION DATE" — though exchange-traded options can still be sold in the secondary market before expiry to square off. (b) "American options can be exercised by the buyer ANY TIME ON OR BEFORE the expiration date." (c) is the option type of exchange-traded interest rate options in India, which are European, not a separate exercise style.
Where this is taught
Free preparation for NISM Series V-DRelated terms
- Payoff chartA graph plotting an underlying's expiry price on one axis against a derivative position's profit or loss on the other — a straight, symmetric line for futures, and a kinked, asymmetric one for options.
- Square-off of optionsClosing an open interest rate option position before expiry by selling a bought option, or buying back a written one, realising only the change in premium rather than the payoff the option might have had at expiry.
- RolloverCarrying a derivatives position past expiry by closing the expiring contract and opening the same position in the next series simultaneously — the only way to hold a view longer than one contract cycle.
- Long positionAn outstanding, unsettled buy position in a derivatives contract — the buyer of a futures contract, or the buyer (holder) of an option, is said to be long.
- Short positionAn outstanding, unsettled sell position in a derivatives contract — the seller of a futures contract, or the seller (writer) of an option, is said to be short.