A day rollover occurs when an investor’s account is not settled by the end of a trading day, resulting in an extra day of trading activity. This happens when the end of a day falls within a trading range (two successive days with very similar market values). For example, if you sell a futures contract on a particular stock at the end of the day, and then the next day the stock price moves up to close above the sale price on the day before, the contract will be marked as a profit even though it was actually a loss. The mark-to-market methodology used to value contracts means the contract is marked as a profit, even though it was actually a loss. This means that, if the contract remains open, it will be a long position the next day, resulting in a day rollover. If the contract is closed out before the end of the day, there is no day rollover.
How does a day rollover affect your account?
If you have a long position that rolls over into the next day, you will start out with a long position on the day after you bought the contract. This means that you will have to buy more shares to get back to your position if you want to close out the contract and get out of the trade. If you have a short position that rolls over into the next day, you will start out with a short position on the day after you bought the contract. This means that you will have to sell more shares to get back to your position if you want to close out the contract and get out of the trade. The extra buying or selling needed to close out the contract and get out of the trade can lead to a significant loss.
Why do day rollovers happen?
A day rollover can happen for the same reasons as a day rollover in the cash market: an investor’s account does not settle by the end of the day. There are two main reasons why this can happen:There is a delay in the settlement of your account, orThere is a delay in the calculation of the value of your open contracts.Let’s look at these in more detail:
There is a delay in the settlement of your account: If there is a significant change in the value of your account during the day, such as the announcement of a major event, then the settlement of your account may be delayed until the end of the day.
There is a delay in the calculation of the value of your open contracts: This can happen if there is a significant change in the value of the underlying instrument during the day. For example, if a company announces that it is buying back a significant amount of its own stock, then the value of the stock will drop significantly during the day, resulting in a significant change in the value of your contracts.
Strategies to avoid day rollovers
To avoid day rollovers, you can use one of the following strategies:- Use a margin account: If you are using a margin account, the broker will automatically close out your open contracts at the end of the day. This means that there is no day rollover.- Use a time-weighted average: If you are using a time-weighted average, the value of your position will change as the price of the underlying instrument changes. This means that there is no day rollover.
Conclusion
A day rollover can happen when there is a delay in the settlement of your account or the calculation of the value of your open contracts. To avoid a day rollover, you can use a margin account or a time-weighted average. If you use a margin account, the broker will close out your open contracts at the end of the day. If you use a time-weighted average, the value of your position will change as the price of the underlying instrument changes.This article explains what a day rollover is, what the risks are, and some strategies you can use to avoid a day rollover.