Scale medium-term view with rollovers: Shubham Agarwal!
Rollover is a trading activity where trader moves their position from current expiry to the next expiry.
November expiry day came with a meaningful fall. The struggle at the end of monthly expiry does raise questions. However, with the measure of expiry we get the Rollovers. This is the number that tells a lot about what the broader expectations from stocks and indices for the coming expiry are.
A lot of traders take trades for a few days. While expiry is important, it does not stop trades from taking the trade even if the position is taken before the day of expiry and is expected to be closed after the day of expiry. This is where Rollovers Percentages are relevant and important.
What is Rollover?
Rollover is a trading activity where trader moves their position from 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, Buyback the sold position and Sell it again in 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.
We all know now that trade data of futures helps us in identifying the participation in a directional move. This reading helps in identifying which move is stronger than the other. If a stock goes up by 10% and Open Interest goes up by 25% 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.
Where Rollovers Percentage Helps?
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 of Rollovers will help us in validating the basis of our Trade (the increase in Open Interest).
If Rollover percentage comes out be ~10% below the 3M average Rollover percentage, there is a bright possibility that participation created in last expiry most probably decided to book profits and not carry forward.
How do we use this?
Look for the rollover percentage before beginning of the next trading session. Whenever in the Futures of stock/ index of my trading position I see very low rollovers, I do not get out of the trade right away. However, there are few things one should be ready with.
- If the trade is in futures, I buy an Option to hedge (for Buy Future, Buy Put / for Sell Futures, Buy Call)
- If you have traded an Option (Call Buy / Put Buy), I Sell a Higher Call/ Lower Put. This is because the trend lost its strength, it could get difficult to make money right away. Selling Option is saves premiums lost due to passage of time.
- Lastly, simply tighten my stop loss.
The open interest data required for calculating rollovers is available freely on NSE website. Most options analytics applications would have calculated data too.
First published on 30 Nov 2024: prices, lot sizes and expiries are those of that time. They are illustrations for education only, not investment advice. Derivatives trading carries risk; read all scheme and risk documents before trading.
