Understanding Derivatives Rollover Data

Rollover percentage indicates whether traders are willing to carry forward their existing positions (long or short) to the next series or not. Generally, the rollover figures alone will not indicate which direction traders are betting on.

On the last Thursday of every month; when the monthly expiry of futures and options takes place, positional traders need to decide whether they should let their positions lapse or carry it forward , that is, enter into a similar contract expiring at the future dates .

The latter is called a Rollover’ ‘- the  carrying forward of ‘futures’ positions from one series  to the next one.

Since the rollover decision must have been made with an assumption around whether the existing  momentum would continue, it has important insights into expectations – which is what the futures markets are all  about! Example if he expects further upsides in the near term, he would opt to rollover his long position to the next series or if there is an expected reversal in the ongoing move or uncertainty then he may let the contract expire.

Rollovers are expressed in percentage terms and indicates how much of the current month Open Interest (IO) positions in futures are being carried forward to the next month series.

Rollover = (Combined Mid and Far Open interest / Total open interest across series)*100

Interpreting Rollover %

On most of the occasions, ‘lower-than-average’ rollover signals uncertainty, while higher rollovers indicate strong sentiments and the ongoing momentum to continue. Remember that we wont  know whether the same investors from the previous series have carried forward their position to the next month series or an altogether different set of investors – but does indicate sentiment of whoever it is.

The rollover figures alone do not have any significance and one has to see 2 or 3 other important things to gauge what may happen in the next series:

  • Current Vs Previous Rollover : Lets say a contract’s rollover in Nifty futures from April 2019 series to May 2019 is at 75 percent and the three-month average is 65 percent, it means traders are more convinced about their views on the market and willing to carry forward their positions to the next series. However, many times, rollover trends can be misleading as the base on which such rollovers have happened is important.
  • Open Interest Base : Illustratively, a 70 percent rollover may have taken place at a lower base of open interest than the average rollover of 65 percent which may have been on a much higher OI base. The underlying base from which the rollover happened is therefore important in a historical context.
  • Current Base of Rollovers: Roll cost means at what basis, percentage or points positions are being carried from current series to the next series. Positive price movement along with higher rollover and comparatively higher roll cost suggests the continuation of positive trend.

Roll cost = ((Next series price – Current series price) / (Current series price) %

A high level of rollovers to the next series combined with an increase in the cost of carry is an indication of bullishness on the underlying stock or index. For instance, let’s say the Nifty witnesses a rollover of 80 per cent of the contracts from the current month series to next month series. Such rollovers coupled with an increase in the premium of Nifty futures over spot Nifty indicate bullishness on the Nifty. On the other hand a high rollover to the next series combined with a decrease in cost carry is an indication of bearishness on the underlying stock or index.

  • Price Action : Positive price action in the stock along with a higher rollover % figure suggests that strength could continue. Negative price action in the stock along with higher rollover suggests that weakness could continue. Positive price action in the stock with lower rollover suggests that pace of strength is weakening or an early sign of pause in the uptrend while a Negative price action in the stock with lower rollover suggests that pace of weakness is getting lower or an early sign of bottom out process.

There are no such predefined benchmarks for rollovers but they are compared on the basis of historical data, especially the trailing one-month / three-month / six-month averages.

We also look at rollover D-1 (One day before expiry), D-2 (Two days before expiry), D-3 (Three days before expiry) to understand the progress of rollover in expiry week.

Getting these Insights
Rollover data is not readily available on the exchange websites. This is calculated by derivative analysts (Prabhudas Lilladher analysts share this with our trading clients on a daily and weekly basis) using bhav copies and interpreting these via analysis.

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