" Strip hedges and stack hedges are prevalent in industries where producers sign agreements to deliver amounts of oil or other commodities in a sequential fashion. For example, an oil producer might have signed an agreement to deliver a fixed amount of oil each month for the next year. One method of hedging the price risk is to immediately go long in a series of forward contracts (i.e., a strip hedge) with delivery dates and amounts matching the agreement. In this fashion, the producer effectively locks in the monthly forward curve for the next year. Bid-ask spreads tend to widen as the contract maturity increases, however, because longer-term contracts can be very thinly traded (or even non-existent). This can make the strip hedge costly or even impossible to implement. To help reduce transaction costs, the oil producer might instead utilize a stack hedge. To form a stack hedge, the oil producer would enter into a 1-month futures contract equaling the total value of the year’s promised deliveries. As transactions costs are less for short-term (e.g., 1-month) contracts, the total cost of implementing this strategy is less than for a comparable strip hedge. At the end of the first month, the producer rolls into the next 1-month contract, and so forth, each month setting the total amount of the contract equal to the remaining promised deliveries. This strategy of continually rolling into the next near-term contract is referred to as stack and roll."
I always thought rolling short term futures has higher transaction cost, don’t they?