Updated on March 11, 2023
Rollover option simply means switching from one contract, which is about to expire to another, similar contract with a later expiry date. It is a term used in stock trading, which means carrying forward of futures positions to the next settlement date. As futures and options contracts expire on the last Thursday of a month, ‘rollover’ gives the holder an option of closing the contract which is about to expire and re-opening a new, similar position in a next-month expiry contract.
What are the features of Rollover Option?
Key features of a Rollover Option are:
1. Rollover option means closing the current month position and initiating a similar position for next month.
2. Large institutions and big investors conduct most of the big rollovers as compared with individual traders.
3. In a rollover option, the rolling price is not of much importance but the spread is quite meaningful.
What are the limitations of Rollover Option?
Rollover option has certain limitations like:
1. In trading futures and options, leverage works both ways-it can multiply the profits manifold but the losses can also be huge
2. Price fluctuations can cause losses
3. Rolling over entails selling a contract and buying back another, which involves brokerage & charges both the times