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.

RELATED TERMS
  1. Roll Yield

    Roll yield is the return generated by rolling a short-term futures ...
  2. Expiration Time

    The expiration time of an options contract is the date and time ...
  3. Buying Forward

    Buying forward is an investment strategy that involves the buying ...
  4. Contract Month

    The month in which a futures contract expires. The contract can ...
  5. Long Dated Forward

    A long dated forward is a type of forward contract commonly used ...
  6. Serial Option

    A short-term option on a futures contract in which the underlying ...
Related Articles
  1. Investing

    Is USO a Good Way to Invest in Oil?

    The United States Oil Fund is better suited to short-term investors who actively manage their portfolios.
  2. Trading

    Forward Contracts: The Foundation Of All Derivatives

    An investor can assess interest rate parity and implement covered interest arbitrage by using a currency forward contract to generate risk-free returns.
  3. Investing

    3 Reasons to Use ETF Options Over Futures (SPY, QQQ)

    Learn about exchange-traded fund (ETF) options and index futures, and why it might be a better decision to use ETF options instead of futures.
  4. Trading

    How to Trade Options on Government Bonds

    A look at trading options on debt instruments, like U.S. Treasury bonds and other government securities.
  5. Trading

    How To Lock In An Exchange Rate

    Currency risk can be effectively hedged by locking in an exchange rate through the use of currency futures, forwards, options, or exchange-traded funds.
  6. Investing

    Investing in Crude Oil Futures: The Risks and Rewards

    Learn about the risks and rewards of trading oil futures contracts. Read about a few strategies to limit the risk in trading oil futures contracts.
  7. Investing

    Bank of America Shares Seen Rising 8% Short Term

    Shares of BofA have outperformed the broader S&P 500 in 2018, up by nearly 2%.
  8. Trading

    Give Yourself More Options With Weekly and Quarterly Options

    Weekly and quarterly options were introduced to give a greater choice of option expirations to investors, and enable them to trade more efficiently.
Hot Definitions
  1. Gross Margin

    A company's total sales revenue minus its cost of goods sold, divided by the total sales revenue, expressed as a percentage. ...
  2. Inflation

    Inflation is the rate at which prices for goods and services is rising and the worth of currency is dropping.
  3. Discount Rate

    Discount rate is the interest rate charged to commercial banks and other depository institutions for loans received from ...
  4. Economies of Scale

    Economies of scale refer to reduced costs per unit that arise from increased total output of a product. For example, a larger ...
  5. Quick Ratio

    The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets.
  6. Leverage

    Leverage results from using borrowed capital as a source of funding when investing to expand the firm's asset base and generate ...
Trading Center