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Managing Contract Expiration
All futures contracts have a defined expiration and a specific delivery date. Part of managing your futures position is knowing what to do when your contracts approach expiration.
Most traders are in the futures markets to profit from variations in price movement, they do not want a cash settlement or a physical delivery when their contracts expire. So only a small percentage of trades actually go through delivery.
To avoid delivery, traders offset their position prior to expiration. One way to do this is by liquidating. A trader liquidates when they wish to exit an established position.
Rolling Contracts Forward
Another option to avoid delivery is to roll the contract forward, which means to offset your current position and establish a new position in a forward month. Traders do this when they do not want to give up their market exposure when the contract expires.
To illustrate, as futures contracts expire they roll off the board. So a trader with exposure in a March contract has to get out of the March position and move their interest into June.
There are two ways they can do this:
The first way is to leg in or initiate a spread. To leg in means selling the March contract, then buying a June contract in two separate transactions.
The second way is to initiate a spread, or position roll. With this option the closing order of the March contract and the opening order of the new June contract are executed simultaneously.
Unlike legging in, there is no time gap between the two orders. That is important because a time gap can result in slippage, the potential loss from market moves between the closing and opening orders. Using the roll to move positions forward in a single transaction minimizes the chance of slippage.
Now that you know how to roll your position and manage expiration, you should feel much more confident trading futures.