Roll schedule

What Is a Roll Schedule?

A roll schedule is a predetermined plan or timeline outlining when an investor or fund will transition their position from an expiring futures contract to a new, more distant contract. This process, known as "rolling over" a position, is crucial in derivatives trading, particularly within the commodities and financial futures markets. It falls under the broader financial category of portfolio management and is essential for maintaining continuous exposure to an underlying asset without taking physical delivery when the current contract reaches its expiration date.

History and Origin

The concept of standardized futures contracts, which necessitates a roll schedule, has roots stretching back centuries. Early forms of agreements for future delivery, known as forward contracts, can be traced to ancient times, with more organized markets emerging in 17th-century Japan with the Dōjima Rice Exchange. In the United States, the Chicago Board of Trade (CBOT) introduced the first standardized futures contracts in the mid-19th century, initially for agricultural products. As these markets evolved and became more sophisticated, especially with the advent of financial futures in the 1970s, the need for a systematic way to manage expiring positions became paramount. The roll schedule developed as a practical solution, ensuring that traders and investors could maintain continuous market exposure, whether for hedging or speculation, without the burden of physical settlement.

Key Takeaways

• A roll schedule dictates the timing for moving a futures position from a near-term contract to a further-dated one.
• It is essential for maintaining continuous market exposure in futures without physical delivery.
• The process can be influenced by market conditions such as contango or backwardation, affecting potential costs or gains.
• Managed futures funds and exchange-traded funds (ETFs) heavily rely on predefined roll schedules.

Interpreting the Roll Schedule

Understanding a futures contract's roll schedule is vital for traders and investors to manage their positions effectively. The primary goal of adhering to a roll schedule is to avoid the physical delivery or cash settlement obligations that arise when a futures contract reaches its expiration. Market participants typically "roll" their positions by simultaneously closing out their expiring contract and opening a new position in a deferred contract month for the same underlying asset.

The cost or benefit of rolling a position is known as the "roll yield," which is influenced by the shape of the forward curve. If the market is in contango, meaning future prices are higher than the current spot price, rolling forward typically incurs a cost. Conversely, if the market is in backwardation, where future prices are lower than the spot price, rolling can generate a positive yield. The timing within the roll schedule can also impact the liquidity and price of the contracts being traded.

Hypothetical Example

Consider an investor holding one contract of crude oil futures, specifically the September contract, with an approaching expiration. The investor wishes to maintain their exposure to crude oil prices for the next quarter.

1. Current Position: One long crude oil futures contract, September expiration.
2. Market Scenario: The September contract is trading at $80.00 per barrel, and the December contract is trading at $81.50 per barrel (a state of contango).
3. Roll Schedule Action: According to their roll schedule, the investor decides to roll their position one week before the September contract's last trading day. They simultaneously sell their September contract at $80.00 and buy a December contract at $81.50.
4. Outcome: The investor effectively maintains their long exposure to crude oil. However, due to the market's contango, they "bought high" relative to where they "sold low" for the continuous exposure, incurring a roll cost of $1.50 per barrel (excluding commissions and other trading costs). This cost is a function of the volatility and price difference between the two contracts at the time of the roll.

Practical Applications

Roll schedules are fundamental in several areas of finance:

• Commodity Exchange-Traded Funds (ETFs): Many commodity ETFs do not physically hold the underlying commodity but rather invest in a laddered series of futures contracts to provide exposure.⁶ These funds operate on strict, transparent roll schedules, often rolling from the front-month contract to the next most liquid contract before expiration. This systematic rolling impacts the fund's performance, especially in prolonged periods of contango, where the continuous selling of cheaper expiring contracts and buying of more expensive deferred contracts can create a "drag" on returns.⁵
• Active Futures Trading: Professional traders and institutional investors employ roll schedules to manage their ongoing positions in various futures markets, including equity indices, currencies, and interest rates. Understanding the roll schedule for a specific futures contract, such as those listed by the CME Group, is crucial for planning trades and managing portfolio rebalancing around expiration events.⁴
• Hedging Strategies: Companies that use futures contracts to hedge against price fluctuations (e.g., airlines hedging fuel costs, agricultural producers hedging crop prices) also follow internal roll schedules to ensure their hedges remain effective across different time horizons.

Limitations and Criticisms

While essential for continuity, the roll schedule process and its inherent costs are subject to limitations and criticisms, particularly concerning "roll yield." Roll yield refers to the gain or loss incurred when rolling a futures position.³

One of the main criticisms arises from the impact of contango, where the price of a futures contract for a distant delivery date is higher than for a closer delivery date. In such a market, investors continuously rolling their positions may face a consistent "roll cost," or "contango bleed," as they sell the cheaper near-term contract and buy the more expensive longer-term contract.² This can erode returns over time, causing futures-based investments to underperform the underlying spot price of a commodity. Some academics and practitioners argue that the traditional interpretation of "roll yield" can be misleading, emphasizing that the focus should be on managing portfolio risk and the expected returns from changes in futures prices, rather than solely on the roll yield itself.¹

Roll Schedule vs. Futures Contract Expiration

While closely related, a roll schedule and futures contract expiration are distinct concepts.

Futures contract expiration refers to the specific date and time when a futures contract ceases to trade and its obligations for delivery or cash settlement become due. It is a singular point in time for a particular contract.

A roll schedule, on the other hand, is the pre-defined process or strategy employed by an investor or fund to systematically move their position from an expiring futures contract to a new, non-expiring contract. It's a plan of action to manage continuous exposure across multiple expiration dates, ensuring that positions are transitioned smoothly before the current contract's final settlement. The expiration date is a fixed event that triggers the need for a roll according to the established roll schedule.

FAQs

How often do futures contracts typically roll?

The frequency of rolling depends on the specific futures contract and the investment strategy. Many commodity and financial futures contracts are quarterly, meaning they expire and require rolling every three months (March, June, September, December). However, some contracts have monthly expirations, leading to a more frequent roll schedule.

What happens if I don't roll a futures contract?

If you hold a futures contract until its expiration date and do not close your position or roll it, you will be subject to the contract's settlement terms. For physically settled contracts, this would mean being obligated to take or make delivery of the underlying asset. For cash-settled contracts, the contract would be settled financially based on the final settlement price, and your account would be debited or credited accordingly.

Does rolling a contract always cost money?

No. While rolling a contract in a contango market typically results in a cost, rolling in a backwardated market can result in a gain, also known as a positive roll yield. The outcome depends on the price difference between the expiring contract and the new contract at the time of the roll, which is determined by the shape of the forward curve for that particular asset.

Can individuals manage their own roll schedule?

Yes, individual traders with direct access to futures markets can manage their own roll schedules. This involves monitoring the expiration date of their current contracts and actively executing simultaneous sell-to-close and buy-to-open trades in the appropriate deferred contracts. However, this requires active management and understanding of market dynamics, including liquidity and potential slippage during the roll period. Many choose futures-based exchange-traded funds or managed futures funds to outsource this process.