New Contract price during a Rollover

CFA Level I
#1

Hi, when a rollover takes place, is the price of the new contract based on then market prices

#2

Yes.

For example
In Jan you go long an future at $99 for deliver at the end of March.
1 week before expiry at the end of march the March contrcat is prices at $107 and the contact for June delivery is priced at $110.
If you want to rollover you short a March contact at $107 (exchnage see you a long and short and nets them off booking gain of $8)
Buy you fo long a new June contract at $107.

So the “rollover” in this case as your overal desire is to be long , is short the near term contract and long the far term.

You would usually do thse with your dealler as rollover trades so yuu do both legs simultaneously, and there probably will be people with short psoitions who also want to rollover/

#3

thanks a ton

#4

Let’s say, i picked up some contracts at 3.090, now the current price is 2.450 with a rollover date of 20th Dec. Do you suggest i wait for the rollover, as the new contract price will be in and around 2.450 - 2.500 (considering that to be the current price on the date of rollover) and benefit from the profit due to the rollover adjustment

#5

With the limited information you have given i would rather bet on the lottery.

#6

My query is, say i bought 1000 contracts of Natural Gas at 3.090. The current sell price has dropped to 2.450 with a rollover date of 20th Dec. Suppose, i close the position at the current rate, i would incur a huge loss. Instead, if i wait for the New Contract (rollover on 20th Dec), you said the New rate will be based on then prevailing rates (for example the price remains the same at 2.450). Will i get a plus amount towards rollover adjustment. If yes, then, is it better to wait for the rollover rather than close the position before the rollover and lose.

Please advise.

thanks.

#7

I suggest you read the behavioural finance section on loss aversion.

If you think gas prices will go up keep your position, if you think they will go done get out if it.
If you don’t have an opinion why have you invested?

If you are in futures presumably you have had to put in more margin as you hare sat on losses.

Assuming “fair pricing” of the contacts it should make no difference to your opinion on the the gas price.