Finding trend beyond expiry with rollovers: Shubham Agarwal

F&O Cues

Monthly expiry days are the days when the current month Futures contracts expire. While us traders can view and do the analysis of the current expiry with the help of positions created, the same needs a validation when all the current month contracts are expired. To help gauge a trend and its strength we need to look at rollovers.

What is Rollover?

Rollover is a trading activity where trader moves their position from current expiry to the next expiry. The activity is done by Selling the bought position and buying it again in the next expiry for every Buy position. Similarly, Buyback the sold position and Sell it again in next expiry for every sell position.

What is Rollover Percentage?

Rollover percentage is the basic approximation of how many such rollovers took place. The extent of rollovers can be figured out by doing a simple calculation.

Rollover Percentage = Open Interest of all Expiries except Current / Total Open Interest, of a Futures contact.

Here open interest is the number of contracts in existence for a Future instrument with a particular expiry.

We all know now that trade data of futures helps us in identifying the participation in a directional move. This reading helps in identifying which move is stronger than the other. If a stock goes up by 5% and Open Interest goes up by 15% for instance, it gives us indication that new open interest (contracts) has been created by Buyers of the Futures pushing the prices up. We can set the expectation that the consensus is the Stock / Index could go up.

Where Rollovers Percentage Helps?

Consider that, such a stock was bought by us on Tuesday with Thursday being the expiry. Now, we go thru the expiry. The critical information of Rollovers will help us in validating the basis of our Trade (the increase in Open Interest).

If Rollover percentage comes out be ~10% below overall Rollover percentage, there is a bright possibility that participation created in last expiry most probably decided to book profits and not carry forward.

How do we use this?

Look for the rollover percentage before beginning of the next trading session. Whenever in the Futures of stock/ index of my trading position I see very low rollovers, I do not get out of the trade right away. However, there are few things one should be ready with.

1. If the trade is in futures, I buy an Option to hedge (for Buy Future, Buy Put / for Sell Futures, Buy Call)

2. If you have traded an Option (Call Buy / Put Buy), I Sell a Higher Call/ Lower Put. This is because the trend lost its strength, it could get difficult to make money right away. Selling Option is saves premiums lost due to passage of time.

3. Lastly, simply tighten my stop loss.

The open interest data required for calculating rollovers is available freely on NSE website. Most options analytics applications would have calculated data too.

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