What does rollover mean in the stock market?

Rollover in the stock market means to carry forward a contract position to another expiry date. This usually happens when a trader suspects that there will be too much loss to be incurred on a contract, and would rather not exercise it, he can decide to rollover. Traders can rollover on expiry by either letting a position lapse or enter into a similar contract that will expire at a future date. Rollovers are only possible in futures and not options

Rollovers become available to traders as early as a week before the expiry date, lasting through the last minute if the market hours on the expiry dates. Many traders prefer to rollover on the last day in hope that the price movements will change in the direction they expect.

How does rollover apply to futures market?

In the futures market, price movements tend to be very volatile and unpredictable. There is no telling the exact position a price could be. Price movements could either move up rapidly in one day and drop by the next day, or vice versa. To lessen the impact of market volatility, investors and traders use a futures contract to predict the future price movements of stocks. In cases where the market does not move in a positive direction and would probably incur losses for the trader, the trader opts for a “rollover” to avoid the potential losses.

For example, if a trader holds 5 long futures contracts of YXZ company slated to expire on the last Thursday of June. If he decides to rollover, he will spare off his position and buy 5 long futures contracts of the same company, then the new contract will expire in July.

Rollovers are usually expressed as a percentage of total positions. There may be no benchmarks for rollovers but can still be compared on the basis of the historical data like the trailing three-month average.