Contract Rollover is always a little tricky, especially if you’re using Continuous Contract charts. I always get questions, like this one from John J.
Hi Barry, Wondering if you could address roll-over days in an upcoming video. I’ve been using the @ES charts like you recommend, but this morning things didn’t look right. After staring at funny charts for a while, I switched to ESH12, and things looked much more ‘normal’. Does it take a few days for people to roll over? Do the pros roll over during roll over day? Thanks for all your hard work. John J.
So, it’s about time I did a proper video, discussing Contract Expiry, Contract Rollover and the pros and cons of using Continuous Contracts. Every job has it’s nuances – and this is just one we have to live with trading Emini futures. Luckily Contract Rollover is only 4 times a year.
Read the video transcript …
I’m recording this video, Thursday, 8th of March 2012. Today was Contract Rollover Day. And on Contract Rollover Day, I always get a bunch of emails from people asking, “What is going on? What contract should I be trading?” and so on. So I thought I’d do a video. I need a video on the site, kind of talking about this as a reference video. So I’m gonna start a little bit from the basics, so apologies to the old hands. I’m just gonna talk about Expiry dates, Rollover dates, and Continuous Contracts. So let’s get into it.
Expiry of futures contracts
First of all, the Emini is a futures contract that expires quarterly. We’ve got March, June, September, and December dates. The contracts are denoted with letters “H,” “M,” “U,” and “Z.” So for example, we’ve just been trading the ES12H contract, though on some platforms it’s ESH12, which was the March 2012 futures contracts of the Emini. Now, that contract will expire on the third Friday of each of those quarters. So March, June, September, and December. So at the end of the quarter, that contract expires. Now, at Expiry, trade in that contract will cease and the trades are settled.
Now, the Emini is an index futures contract based on the index S&P 500. And so, this whole idea of contracts expiring and quarterly contracts and so on was more, you know, kind of was invented really to do with agricultural commodities where there was actually physical delivery of, you know, goods of corn, wheat, you know, bellies, and whatever it might be. With Indexes, we’ve kept this same kind of system but it’s bit of an anachronism. We don’t actually need this for index contracts because, in fact, there’s not actually physical delivery. But you know, there is a settlement and so, this is the, you know, the construct within which we trade futures.
So that’s what Contract Expiry is. But the more important date is actually the Contract Rollover date. The Rollover date happens before the expiry date and it is when the majority of trading moves to the next contract from the old contract to the new contract. And the convention is, for the Emini at least, is that this day is on the second Thursday of each of those months, March, June, September, and December. And that was today, Thursday, the 8th of March was the second Thursday.
Now, for a little twist in it, if the Rollover month starts on a Friday, then it’s the first Thursday of the month. So you know, just a little bit of a quirky thing there. And so trading on the Rollover day switches from the old contract to the new contract. And what I suggest you do is actually trade on Rollover day the old contract. And then the day after Rollover day, switch to the new contract. Or if you like, just avoid trading on the Rollover day altogether. You’d only miss four trade days a year by doing that. But sometimes, the signals are a little less clear. There’s a little bit more chop. There’s not the pace on the tape, in terms of kind of contracts going through because they split on that day effectively between those two contracts. So that’s what Rollover day is. Rollover day is kind of a couple of weeks prior to Expiry, and that’s the convention where everybody starts moving most of their volume onto the new contract.
Okay. Now, on the website, Emini-Watch, all of that information is actually there. What you need to go to is under the “Emini Trading” tab, “What are Emini Futures?” Or in the sidebar, there’s a little link to “What are Emini Futures?” There’s a whole article on Emini Futures and the facts about them. And if you go to the very end of that article, you’ll see a section on “Emini Futures Contracts expiring every quarter.” And that’s where I just have this information listed about the Rollover dates and the Expiry dates. So if you need somewhere to be able to kind of check that information. And of course, always going to the CME website, so cmegroup.com is the website address. And you’ll find that information for Rollover and Expiry dates for the Emini contract there.
Trading with Continuous Contracts
Now, what does that mean for us, kind of, trading? And particularly, what I’m gonna be talking about is Continuous Contracts and the way TradeStations, for example, deals with these contract issues.
So what I’ve got here is a chart just showing you the three contracts. So this is ESH12, which is the March 2012 contract for the Emini Futures that we’ve been trading up until, you know, today. Next with, I’ve got the, ESM Contract, ESM12, which is the June 2012 contract. And then beside that, what I’ve got is the @ES.D, which is the Continuous Contract.
So the Continuous Contract is a combination of each of the current months trade. And the reason why we use a Continuous Contract is they’re very useful because they show you kind of full back history. And particularly, though, particularly invented for back testing trading systems where you wanted to test, you know, five-plus years of trade dates in order to get a sense of, you know, the profitability of a trading system.
In the old days, what you had to do was basically five years would be made up of 20 different futures contracts and you had to run your system 20 different times and then aggregate the PNL for those 20 different contracts to figure out your final numbers. Well, the convention became a simplification to create a Continuous Contract that’s going for all of that period, so you can just test your system kind of once. So TradeStation, I think, were one of kind of the early adopters of, you know, using Continuous Contracts ubiquitously. It was like it was very easily available within their charting platform. And it’s one of the things that I like that makes kind of life simple and easy, kind of going back all the time. But four times a year, you get this kind of Rollover day when things get a little bit kind of odd and you just need to be aware of what’s going on.
So first thing to note is that today, in terms of the volume trading, this is the old contract. What’s just, you know, we’re rolling over from, which is the March contract. You can see the volume we’ve been trading over the last couple of months has been really significant, you know, in the million kind of contracts plus a day. And if you look at that over time, this contract kind of started trading back in second week in December, and that’s when the volume really came into that contract. Previously, the contract was trading. We had, you know, price points throughout that period. But the volume was negligible. You can see it’s actually virtually zero along the line here. And it’s only until that contract comes live that people put all that volume through it.
And the similar, kind of, situation happening. This is the M12 contract, which is the June contract. You can see there’s been no volume traded really until today. Now, today, which is Rollover Day where we’re supposed to be switching to the new contract, let’s look at the numbers. So today’s trade, we had 1.8 million contracts traded in the old contract but only 0.9 million contracts in the new contract. So this is kind of a typical pattern. The volume is switched over. There’s still a pretty high volume in the new contract but still the majority of the trade is going through in the old contract.
What TradeStation does for constructing the Continuous Contract is to move forward to the new contract. So what we have today’s date, we’ve actually got 0.9 million contracts traded, which is the new contract, the June contract that kind of has gone through here. And if you look at the closing prices, 1360.50 is the closing price which is the closing price of the Continuous Contract here. So we switched to the Continuous Contract today, and yet the closing price on the old contract was 66.50. So we’re actually trading at a discount to the old contract, if you like. So we’ve switched on Rollover Day on the Continuous Contract in TradeStation data to this new contract. But in fact, on Rollover Day, we still had the vast majority, you know, a good portion of the trade, the greater portion of the trade kind of going through on the old contract. So just bear that in mind.
Ideally, I’d prefer if TradeStation were actually rolling over the day after. But you know, that’s not the rules. We’re supposed to be trading the front contract. This is kind of a new contract. But in practice, you know, everybody is kinda trading this old contract. So that’s what’s going on.
Now, how is a Continuous Contract traded? Because there’s a difference in price, these things don’t match up. There’s usually a premium or a discount kind of based on, you know, the forward expectations. At the moment, there’s a discount so we’re expecting June to be six points less than March, if you like, you know, when we’ve been in strong bull markets, it’s actually the other way around. We’re usually trading the forward contracts as a premium to the contract, the old contract. But in fact, in this case, we’re actually trading at a discount. Now what happens is TradeStation needs to recompute the old data based on this new difference between the closing prices, actually yesterday. So let me show you this on the Continuous Contract.
So this is the three contracts shown with a good deal of, kind of, price back history here. @ES.D, which is the Continuous Contract, the @ symbol shows you it’s a Continuous Contract in TradeStation, and that’s plotted in green along this chart here. And then you can see, we’ve got two other lines. We’ve got the H contract, which is the March contract, and the M contract, which is the June contract.
Now, because the data has been adjusted, the Continuous Contract, you can just see that the blue cyan is just overlaying this green Continuous Contract. So the current month’s data is the same as the old month data. And the old contract, the March contract, is being shown here above the Continuous Contract because it’s actually trading at a premium to the current contract.
Continuous Contracts on Rollover Day
So yesterday, if I would have brought up this chart, the Continuous Contract, the green price data here would have actually overlaid this orange data for the March contract because the Continuous Contract was still the March contract. As we rolled over to the June contract, the data in TradeStation was adjusted and shifted down by six points or so across all of that back history. So that’s why you might look at the Continuous Contract chart after Rollover and the price points will actually be different. The shape of the chart will be identical. The volume will be identical. The signals will be identical. It’s just what the price actually is will be different because we’ve adjusted for that difference in contracts and prices. So hope that kind of makes sense.
Now, just as a practical matter, when Contract Rollover happens, you’ll actually see a good deal of charts. So this is today’s trading on the Thursday. This is the overnight session. This is Wednesday. Now, on the close of Wednesday, we’ve flipped over. The charting packages all flipped over to using the Front Month Contract, the new contract. And there was a good deal of volatility in the price actually being plotted around that time where the market was pretty volatile during that phase anyway. But usually, you’ll see a good deal of kind of priced chop happening in the course, maybe, just one or maybe two bars. And that kind of just reminds me of…okay, there we go, Contract Rollover, is what’s kind of making the day look a little bit funky.
Now, and what I always do is, first thing I do is I refresh the data in all of my charts. So I hit Ctrl+R to refresh all of the data on my chart. I shut down all my charts in TradeStation and restart TradeStation. And that should reload all of that back-history dates when it should be correct.
You know, occasionally, I suppose, there might be problems with that back history. And what you might want to do is flush your cache, which is kind of go into the cache folder within your charting platform. Delete it or rename it with your trading platform shut. You gotta close your platform before doing that. Then reopen your trading platform and then that cache data will be re-downloaded from fresh and it will be kind of good, clean data. But just be aware, around that time period, there’s a little bit of chop in the data around so just refresh your chart.
Now, in terms of trading signals during that day because, you know, we’ve kind of rolled forward to the new data and the new data is only being based on, you know, a third of the volume. The majority of the volume is kind of going through on the old contract. You know, one of your options is not to trade it at all. That was what I actually did today. For me, I saw that the market was moving pretty slowly. There was a really nice setup which I’m just about to show you but for me, the market was moving really slowly so I decided not to trade it.
This is what the chart looks like on a 1500 Tick Bar chart for the Continuous Contracts. So this is rolling over to that new contract and there wasn’t so much trade going on so you can see the amount of a number of trades because each of this bars is 1500 trades or ticks, kind of, going through. There’s not a lot of trade if I compare that with the @ESH12. So this is the old contract. This is the trading day, exactly same kind of bar spacing here on this chart. The bar spacing is 4 on this chart, and this is the amount of trade that went through on this contract today. This, exactly the same bar spacing at 4, this is the amount of trade that went through. So it was literally one-third of the trade that was happening on the old contract, if you like.
On the new contract, you know, overnight, we’ve had the market kind of shoot up into the 60s type level. We reached a critical resistance point. We fell back down, found support. It was actually a flush pattern. So we’ve had exhaustion selling bullish divergents around the support level, which again, I recognize this is a nice little setup that I like of kind of trade taking for a reversible of trade, you know, a trend. The market had kind of just peaked out yesterday, kind of come down a little bit. We had that at the end of day and we actually moved forward. And then when we had a flush signal at support, that was after changing trend here. That was a good signal to kind of take a long drive. We’ve broken in this chart into an uptrend.
Similar type pattern on the 1500 Tick Bar chart, on the @ESH, so the old contract, if you like. So at the end of yesterday, we had exactly the same thing. Exhaustion selling, bullish divergents overnight, we kind of peaked there. But instead of a flush pattern at the beginning of the day, we had another exhaustion selling and bullish divergents pattern kind of come in at cyclical support. Rainbow patterns here, blue professional bars step in, a bunch of blue professional bars here. This little exhaustion barring signal is actually, you know, basically a rush for people to buy the contracts. It’s like they’re buying this as we go forward. That formed the bottom of this move. And then we’ve had exhaustion buying and bearish divergent signals kind of come in.
But because this have happened after we’ve got a trend move, this is happening on the left shoulder, we need to wait for the pullback to end of trend. That was a really nice signal for the top of the day. There was a flush pattern at the end of the day so that whole move from the bullish divergents here, right through the pullback to end of trend signal here was a beautiful little kind of trade signaled on this. And this was marked on the old contract, if you like, the H12 kind of contract. And the @ES contract was showing the same type of pattern, the same type of signal but slightly different in terms of, you know, because of the volumes that were kind of going through.
How to trade Rollover Day
So my suggestion would be, if you’re gonna trade Rollover Day, I would actually have both charts open. I would have all your charts open with the @ES contract. And then I’d just set up a duplicate set of charts side by side using the old contract so the @ES or whatever, you know, the old contract just to see them side by side. See where the majority of the trade is kind of going through and the volume going through. And you’ll be able to see that by the pace of the trade so that the charts, if you’re using Tick Bar charts, the speed at which new bars are being drawn should be quicker on the older chart if that’s where the majority of the volume is going through. And then take your signals off that older chart is what my suggestion would be.
So there we go. Hopefully, that was helpful to you. It’s, you know, one of those wrinkles that some of you got to get used to. Ideally, you know, I don’t think we actually need it, our Index Contracts, but we’re sitting in this kind of old paradigm of Futures contracts. And so, you know, that’s what we kind of have to live with.
There we go. And I’ll make sure I have this video kind of available at a suitable place so you can reference it in the future, just talking about Contract Expiry, Contract Rollover, and Continuous Contracts.