Rollovers help gauge carry forward of strength into next expiry

Future and Option

Shubham Agarwal

June expiry has just gone by. We all got bombarded with information about Rollovers percentage. Most traders hold their trades at the most for a week. So, do we really need information that talks about an entire expiry?

We do need this information when we have taken a trade just a day before expiry and we intend to hold it for a few days into the next expiry period. This is a piece of information that could decide whether to keep or exit the position right after the expiry date of the current expiry. Before we go into the importance of Rollovers. Let us understand what Rollovers are and how this Rollover percentage is calculated.

What is Rollover?

Rollover is a trading activity where trader moves their position from the current expiry to the next expiry. The activity is done by Selling the bought position and buying it again in the next expiry for every Buy position. Similarly, Buy back the sold position and Sell it again in the next expiry for every sell position.

What is Rollover Percentage?

Rollover percentage is the basic approximation of how many such rollovers took place. The extent of rollovers can be figured out by doing a simple calculation.

Rollover Percentage = Open Interest of all Expiries except Current / Total Open Interest, of a Futures contact.

Now, we do understand that trade data of futures helps us in identifying the participation in a directional move. If a stock goes up by 10 percent and Open Interest goes up by 25 percent, for example, it gives us comfort that new open interest (traders) have entered Buying the futures and pushing the prices up. We can set the expectation that the consensus is the Stock / Index should go up.

How will Rollovers Percentage Help?

Consider that, such a stock was bought by us on Tuesday with Thursday being the expiry. Now, we go thru the expiry, the critical information on Rollovers will help us in validating the basis of our Trade (the increase in Open Interest).

If the Rollover percentage comes out to be ~10 percent below the 3-month average Rollover percentage, there is a bright possibility that participation created in the last expiry most probably decided to book profits and not carry forward.

What is the actionable?

Well once we see very low rollovers, I do not get out of the trade right away. However, there are a few things one should be ready with.

1. If the trade is in futures buy an Option to hedge (for Buy Future, Buy Put / for Sell Futures, Buy Call)

2. If you have traded an Option (Call Buy / Put Buy) Sell a Higher Call/ Lower Put. This is because the trend lost its strength, and it could get difficult to make money right away. Selling Option saves premiums lost due to the passage of time.

3. Lastly, simply tighten your stop loss.

The open interest data required for calculating rollovers is available freely on the NSE website. Most options analytics applications would have calculated data too.