As of today the lead contract traded in the E-mini S&P 500 Futures and the other stock indices is the December contract. Equity futures expire Traders long or short stock index futures must handle their positions themselves. They can either exit, let the contract expire and settle to cash or reestablish their position in a later contract month. This is known as roll. So, assuming the trader wants to keep his long or short position, how should he roll, when should he roll and what else does he need to know about rolling? Our Futures expert, Pete Mulmat, joins the guys to explain things.
Rolling should be done either today or Monday. There is no payoff in waiting and the Bid-Ask Spread will only become less liquid as will the September contract. Rolling should be done as a single order. A demonstration showed how to set it up. Tom also explained how it could be done very easily from the monitor page in the TOS system. It is a very tight market with massive liquidity. An additional benefit is that the tick sizes for the spread are smaller than the individual Futures and you are likely to receive a better fill and your transaction cost should be lower.
An important thing to note is that unlike in most Futures in which one is buying the spread if one is buying the front month with stock indices it is the opposite. That means the spread now is negative since the Futures are in Backwardation. Pete explained how the cost of carry works in the stock indices. It is basically a function of borrowing costs and dividends. Years ago, no one expected to see borrowing costs being less than the dividend. Pete also explained why this means that the stocks, indices and Futures all move together and why they are so heavily arbitraged. He provided an example of how an increase in the LIBOR rate would result in less backwardation and a smaller spread. All the calculations were displayed.
For more on Rolling /ES Futures see:
Closing The Gap - Futures Edition from December 11, 2015: "Triple Witching: Rolling /ES"
Best Practices from March 10, 2016: "Rolling /ES Futures"
Closing The Gap - Futures Edition from June 10, 2016: "Triple Witching: Rolling /ES"
Watch this segment of Closing the Gap - Futures Edition with Tom Sosnoff, Tony Battista and Pete Mulmat for the important takeaways and everything you need to know about rolling stock index Futures.
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