01 Dec The Expiring Contract
Expiration and Rollover
The futures contract that we focus on (the eMini Russell 2000 or TF) expires on the third Friday of the months of March (H), June (M), September (U) and December (Z). The rollover days, however, are 8 days before expiration on the second Thursday of each of these months. These months have the letter designations H, M, U, and Z. Depending on the charting and trading platform that you’re using you would usually have to switch your reference to the following month by letting the software know the contract and expiry month/year. On eSignal “TF Z15″ refers to the e-mini Russell 2000 contract that expires on the third Friday December 2015.
When and why you should switch from trading one contract to the next?
Liquidity switches from the current contract to the next contract at 09:30 EST on rollover day. This can be seen by comparing the volume (number of contracts traded) in the old and new contracts.
If you are opening a new position in the TF before 09:30 EST that you plan to close during the day or perhaps before 09:30 you could use the near contract but you must remember that the spread will start widening as traders start switching out of this contract and you will struggle to get as favorable a price as you would with the next contract.
The general rule here is that you want to get into the next contract as liquidity moves from one to the other. At this point in time (09:30 EST on rollover day) the spreads will be tightest and you will lose the least amount on the spread as you switch contracts. This is especially important for swing and longer term traders that may want to carry their positions past the expiry date.
If you are opening a new position that you intend to carry for more than an hour and it’s 09:00 EST on rollover day then you are better off trading the next (new) contract.
Day of Rollover
The second Thursday of the contract expiration month is an interesting day to observe. While the information included above is widely accepted as “general” and “standard” within the world of traders, it seems as though this particular Thursday (rollover Thursday) presents lower-than-average volume historically. We encourage you to verify this for yourself and draw your own conclusions. Our classes discuss these details and offer additional insight as well.