Michael, if I am in the middle of riding a good trend on lets say, a few soybean contracts for example, do brokers offer automatic contract rollovers or will I have to roll it over myself?
Not that I know of, but you can always ask. There may be a technological tool to do that, but I don’t know about it or use it. I don’t know of any manager who would give them such discretion, but there may be ones that do.
Sometimes, managers enter a spread order to roll thereby offset an existing position and enter a new one. They can do that “at mkt” or via a “limit” order.
Existing position:
Long 5 March Soybeans.
To roll with a spread order “at the market,” you’d do the following:
Sell 5 March Soybeans / Buy 5 May Soybeans @ MKT.
In this case, you’d get filled at the prevailing market prices: the bid for March and the Offer for May.
To roll with a spread order, whereby you liquidate your Long March position and establish a Long May position, but at a specific price differential between the March and May contracts, you’d enter a spread Limit order (sometimes written LMT).
Sell 5 March Soybeans/ Buy 5 May Soybeans @ 6 – 0 May
This will instruct your broker to execute the spread, not just one leg of it, ONLY when the differential between the bid price on the March’s and the Offer price on the May’s is 6 cents premium to the March contract (written 6-0). In this case, both contracts can change substantially in price, but not until the spread differential reaches 6 cents, with May being 6 cents premium to March, will the order get filled.
I have never traded with either of these types of orders, nor do I foresee using either of these methods. Generally speaking, the more qualifiers you attach to an order, the more illiquid it becomes. This goes for stocks too.
I am pretty sure that most retail accounts cannot stay long after the First Notice date since they can be elected for delivery, so you’d have to roll or at least sell your position out and go flat. If you don’t do it, they may liquidate you automatically.
how does one determine which contract month to roll to? Thanks.
If you don't have this systematized from back testing, you can just roll
to the next contract month in the strip. Many of the commodity futures
traded are not on a 12-month cycle, so you need to know what you're
dealing with.
You can also consider trading several months out in the first place, as
opposed to trading the front month. This way, you'll give yourself
several months to enjoy the trend and not have to worry about rolling.
how does one determine which contract month to roll to? Thanks.
If you don't have this systematized from back testing, you can just roll
to the next contract month in the strip. Many of the commodity futures
traded are not on a 12-month cycle, so you need to know what you're
dealing with.
You can also consider trading several months out in the first place, as
opposed to trading the front month. This way, you'll give yourself
several months to enjoy the trend and not have to worry about rolling.
Another option is to just use ‘spreadbetting’ to trade commodity positions using ‘daily rolling cash bets’. These positions just charge a small financing fee for leveraged positions, and sometimes a small spread for automatically rolling positions, but this depends on the instrument. These are available via UK brokers like CMC Markets or IGIndex and generally track the underlying commodity futures spot prices, and allow tax free capital gains under UK law. However, I don’t believe this is currently available to US residents.