Futures expiration and rollover

Every futures contract has an expiration date, after which it either settles in cash or requires physical delivery of the underlying asset, depending on the contract. Most traders who want to maintain exposure beyond that date do not intend to take or make delivery, so they close out the contract that is about to expire and open a new position in a contract with a later expiration date, a process known as rolling over the position.

The rollover typically happens some days before the actual expiration date, since trading volume and liquidity in the expiring contract fade as the date approaches, making it harder to trade at a fair price close to expiration. A trader rolling a long position sells the near contract and buys the further dated one, usually at close to the same time, so the switch does not leave the position unhedged or unexposed in between. The price difference between the two contracts at the moment of the roll reflects the basis, and depending on whether the market is in contango or backwardation, that roll can either help or hurt the trader's return over time.

Rollover matters a great deal for anyone tracking a futures based index or a commodity fund, since these vehicles roll their underlying positions on a regular schedule and the cumulative effect of many rolls can cause their long-term returns to diverge meaningfully from simply holding the spot commodity. An investor evaluating a fund built on futures should understand its rollover schedule and how the shape of the futures curve it trades in has behaved historically, since that roll cost, or benefit, can be a persistent drag or tailwind on performance separate from the direction of the underlying asset itself.