DEFINITION of 'Switch'

A futures-trading strategy involving the offset of one contract with entry into another position that has nearly identical details but a longer expiration. Commonly referred to as a "roll forward".


A switch is used by investors wishing to maintain their current positions in contracts that are nearing expiry.

For example, let's say that it is currently Jan 2004, and an energy company that will have 100,000 barrels of oil to sell in Jun 2006 wants to hedge its position. However, the company does not simply buy the Jul 2006 oil futures contract because the company deems this contract too illiquid. It requires a contract to have a delivery period of no more than 13 months in advance. A possible hedging strategy for the company is to short the appropriate number of Jul 2005 contracts, in Jun 2005, close out the Jul 2005 position, and then switch to the Jul 2006 contract.

  1. Roll Forward

    To extend the expiration or maturity of an option or futures ...
  2. Hedge

    Making an investment to reduce the risk of adverse price movements ...
  3. Expiration Date (Derivatives)

    The last day that an options or futures contract is valid. When ...
  4. Position

    The amount of a security either owned (which constitutes a long ...
  5. Futures Contract

    A contractual agreement, generally made on the trading floor ...
  6. Implied Volatility - IV

    The estimated volatility of a security's price.
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    Mutual funds invest in not only stocks and fixed-income securities but also options and futures. There exists a separate ... Read Full Answer >>
  2. How do futures contracts roll over?

    Traders roll over futures contracts to switch from the front month contract that is close to expiration to another contract ... Read Full Answer >>
  3. Why do companies enter into futures contracts?

    Different types of companies may enter into futures contracts for different purposes. The most common reason is to hedge ... Read Full Answer >>
  4. What does a futures contract cost?

    The value of a futures contract is derived from the cash value of the underlying asset. While a futures contract may have ... Read Full Answer >>
  5. What are the main risks associated with trading derivatives?

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