Every March, and other quarterly months (June, September, and December) the futures contracts that track interest rates, currencies, and the stock index futures come to the end of their contract life, and expire. This necessitates the need for traders engaged in these markets to exit these contracts and roll them over to the next quarterly month.

This phenomenon is unique to the futures market and to someone new to trading these markets it can sometimes be confusing. Because March is the end of the quarter, the “Rollover” event is happening throughout the month across most futures contracts, particularly in the financials since they expire quarterly. We here at Online Trading Academy tend to get many questions from our newer futures traders regarding this topic, and although I’ve written about this subject in the past, I think it’s worth revisiting. In this article I’ll attempt to demystify, and more importantly simplify this rollover occurrence.

Because futures contracts are obligations between buyers (to take delivery) and sellers (to deliver) of the underlying commodity or financial product, they must settle, and therefore expire. The normal life span of most futures contracts vary widely, but this isn’t as important to a trader as it is to know when to switch from the expiring contract to the new “front” month contract as this contract will be the most liquid.

There are two primary reasons that a trader needs to switch from the contract that’s going off the board to the front month contract. The first is that liquidity in the expiring contract starts to dry up immediately after rollover day, and with that, spreads become wider which would lead to trades becoming more prone to slippage. Secondly, if a trader holds on to an expiring contract after the first notice date (the date in which a trader may be required to accept delivery) it may cause all sorts of headaches for the broker, and not to mention the trader himself. This is why it’s imperative to know when this date occurs.

As previously mentioned, the financials (equity indexes, interest rates, and currencies) all carry quarterly expiration, which makes it easier for a trader to remember. All of the traditional commodities such as oil, gold, wheat, and the like, rollover more frequently because many producers use these contracts as a way to hedge against their cash crops or physical production.

As an example, below is a calendar of all the pertinent dates for Crude oil. It in, we see all the different months for one year of year of trading.

Futures

The most important date for traders is the settlement which is the last day the contract will trade. A trader will have to rollover the expiring contract a few days in advance of the expiration. There is a calendar, plus an explanation for all the terms listed therein available for all futures contracts traded on the CME at their website here: http://www.cmegroup.com/trading/products/. The products are grouped by sector. To get to the calendar, simply find the specific futures contract and click on the product name link which will take you to the contract specifications page in which you will see the calendar tab.

Lastly, rollover day is different for all of the different contracts. In other words, the number of days before expiration when a trader needs to exit one contract for another varies among the different futures contracts. Below is a list of the groups and days prior to expiration when rollover occurs:

  • Equity indexes - 7 days

  • Currencies -3 days

  • Interest Rates- 14 days

  • Metals-20 days

  • Grains -10 days

  • Energy-3 days

With this information you simply check the product calendar at the beginning of every month and prepare to make the switch from one contract to the next according the rollover days I’ve spelled out above. It’s as simple as that. It’s just an extra step, but a necessary one, when you’re trading —what in my humble opinion — are the best markets in the world.

Until next time, I hope everyone has a great trading week.

Learn to Trade Now


This content is intended to provide educational information only. This information should not be construed as individual or customized legal, tax, financial or investment services. As each individual's situation is unique, a qualified professional should be consulted before making legal, tax, financial and investment decisions. The educational information provided in this article does not comprise any course or a part of any course that may be used as an educational credit for any certification purpose and will not prepare any User to be accredited for any licenses in any industry and will not prepare any User to get a job. Reproduced by permission from OTAcademy.com click here for Terms of Use: https://www.otacademy.com/about/terms

Editors’ Picks

EUR/USD hovers around nine-day EMA above 1.1800

EUR/USD hovers around nine-day EMA above 1.1800

EUR/USD remains in the positive territory after registering modest gains in the previous session, trading around 1.1820 during the Asian hours on Monday. The 14-day Relative Strength Index momentum indicator at 54 is edging higher, signaling improving momentum. RSI near mid-50s keeps momentum balanced. A sustained push above 60 would firm bullish control.

GBP/USD holds medium-term bullish bias above 1.3600

GBP/USD holds medium-term bullish bias above 1.3600

The GBP/USD pair trades on a softer note around 1.3605 during the early European session on Monday. Growing expectation of the Bank of England’s interest-rate cut weighs on the Pound Sterling against the Greenback. 

USD/JPY drops back below 157.00 on Japan's verbal intervention

USD/JPY drops back below 157.00 on Japan's verbal intervention

USD/JPY has come under moderate selling pressure below 157.00 in the Asian session on Monday. The Japanese Yen lost ground to near 157.70 following Japan’s ruling Liberal Democratic Party's outright majority win in Sunday’s lower house election, opening the door to more fiscal stimulus by Prime Minister Sanae Takaichi. However, JPY buyers jumped back and dragged the pair southward on FX verbal intervention by Japan’s Finance Minister Katayama.


Editors’ Picks

EUR/USD hovers around nine-day EMA above 1.1800

EUR/USD hovers around nine-day EMA above 1.1800

EUR/USD remains in the positive territory after registering modest gains in the previous session, trading around 1.1820 during the Asian hours on Monday. The 14-day Relative Strength Index momentum indicator at 54 is edging higher, signaling improving momentum. RSI near mid-50s keeps momentum balanced. A sustained push above 60 would firm bullish control.

Gold sticks to gains above $5,000 as China's buying and Fed rate-cut bets drive demand

Gold sticks to gains above $5,000 as China's buying and Fed rate-cut bets drive demand

Gold surges past the $5,000 psychological mark during the Asian session on Monday in reaction to the weekend data, showing that the People's Bank of China extended its buying spree for a 15th month in January. Moreover, dovish US Federal Reserve expectations and concerns about the central bank's independence drag the US Dollar lower for the second straight day, providing an additional boost to the non-yielding yellow metal. 

GBP/USD holds medium-term bullish bias above 1.3600

GBP/USD holds medium-term bullish bias above 1.3600

The GBP/USD pair trades on a softer note around 1.3605 during the early European session on Monday. Growing expectation of the Bank of England’s interest-rate cut weighs on the Pound Sterling against the Greenback. 

Bitcoin, Ethereum and Ripple consolidate after massive sell-off

Bitcoin, Ethereum and Ripple consolidate after massive sell-off

Bitcoin, Ethereum, and Ripple prices consolidated on Monday after correcting by nearly 9%, 8%, and 10% in the previous week, respectively. BTC is hovering around $70,000, while ETH and XRP are facing rejection at key levels.

Weekly column: Saturn-Neptune and the end of the Dollar’s 15-year bull cycle

Weekly column: Saturn-Neptune and the end of the Dollar’s 15-year bull cycle

Tariffs are not only inflationary for a nation but also risk undermining the trust and credibility that go hand in hand with the responsibility of being the leading nation in the free world and controlling the world’s reserve currency.

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