Roll Forward

What does 'Roll Forward' mean

Roll forward refers to extending the expiration or maturity of an option, futures contract or forward by closing the initial contract and opening a new longer-term contract for the same underlying asset at the then-current market price. A roll forward enables the trader to maintain the investment position beyond the initial expiration of the contract, since options and futures contracts have finite expiration dates. It is usually carried out shortly before expiration of the initial contract and requires that the gain or loss on the original contract be settled.

BREAKING DOWN 'Roll Forward'

Both legs of the roll forward are typically executed simultaneously, in order to reduce slippage or profit erosion due to a change in the price of the underlying asset.

The roll forward procedure varies for different financial instruments.

Options

A roll forward can be done using the same strike price for the new one as the old one, or a new strike can be set. If the new contract has a higher strike price than the initial contract, the strategy is called a "roll up," but if the new contract has a lower strike price, it is called a "roll down." These strategies may be used to protect profits or hedge against losses.

For example, consider a trader who has a call option expiring in June with a $10 strike price on Widget Company, when the stock is trading at $12. As the call option nears expiration, if the trader remains bullish on Widget Company, she can choose to maintain her investment stance and protect profits by either selling the June call option, or by simultaneously buying a call option expiring in September with a strike price of $12. This "roll up" to a higher strike price will reduce the cost of the position, thereby protecting part of the profits from the initial strategy.

Forwards

Forward foreign exchange contracts are usually rolled forward when the maturity date becomes the spot date. For example, if an investor has bought euros vs. the U.S. dollar at 1.0500 for value on June 30, the contract would be rolled on June 28 by entering into a swap. If the spot rate in the market is 1.1050, the investor would sell the same number of euros at that rate and receive the profit in dollars on June 30; the euros would net to zero with no movement of funds. The investor would simultaneously enter into a new forward contract to buy the same amount of euros for the new forward value date; the rate would be the same 1.1050 spot rate plus or minus the forward points to the new value date.

Futures

A futures position must be closed out either before the First Notice Day, in the case of physically delivered contracts, or before the Last Trading Day, in the case of cash settled contracts. The contract is usually sold for cash, and the investor simultaneously buys the same contract amount for the next front month.

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