Roll Forward

A roll forward extends the life of a derivatives position by closing an existing contract that is nearing expiration and opening a new contract on the same underlying asset with a later expiry at the current market price. Traders use roll forwards to maintain exposure, avoid physical delivery, adjust risk, or lock in gains without reversing market exposure.

How it works

A roll forward has two simultaneous steps:
* Close (settle) the soon-to-expire contract.
* Open a new contract with a later expiration.

Executing both legs at once minimizes slippage and profit erosion caused by price movement between trades. The exact mechanics vary by instrument (options, forwards, futures), but the principle is the same: replace the old position with a like exposure that expires later.

Options

When rolling options you can:
* Keep the same strike.
* Increase the strike (“roll up”).
* Decrease the strike (“roll down”).

Choices depend on objectives—protecting profits, reducing premium cost, or changing the risk profile. Example: a trader holds a call with a $10 strike expiring in June while the stock trades at $12. To stay bullish beyond June, the trader can close the June call and buy a September call (possibly with a $12 strike). Rolling to a higher strike can lower the premium expense and help preserve gains from the first trade.

Forwards (FX example)

Forward contracts, especially in foreign exchange, are typically rolled when maturity approaches the spot date:
* The existing forward position is offset (often via a swap), realizing any gain or loss.
* Simultaneously, a new forward is entered for the next value date using the current spot rate adjusted by forward points.

Example: An investor long euros vs. USD at 1.0500 for June 30 value would close that forward around the spot date and open a new forward at the then-current market rate (spot ± forward points), effectively extending the euro exposure without moving cash.

Futures

Futures are rolled before delivery or last trading deadlines:
* Physically delivered contracts must be closed before First Notice Day.
* Cash-settled contracts must be closed before Last Trading Day.

Traders close the expiring contract (settling in cash) and simultaneously enter the same futures contract with a later expiry at the prevailing price. Example: closing a June crude oil long at its market price and opening a later-dated crude future.

When to use a roll forward

• Maintain a directional or hedged position beyond the current expiry.
• Avoid physical delivery or settlement logistics.
• Adjust strike or expiry to reflect changed market views.
• Preserve unrealized gains while continuing exposure.

Execution considerations

• Execute both legs simultaneously to limit slippage.
• Account for transaction costs, bid/ask spreads, and liquidity in the new expiry.
• Rollover pricing may include a spread (e.g., forward points in FX).
• Be aware of tax and accounting consequences when closing and reopening positions.

Key takeaways

• A roll forward replaces a near-expiry derivatives contract with a similar contract that expires later, preserving market exposure.
• It applies to options, forwards (commonly FX), and futures.
• Strategy variants (roll up, roll down) allow adjustment of strike or exposure to manage risk and costs.
• Proper execution and awareness of costs, liquidity, and settlement rules are essential for effective rollovers.