How does a CFD rollover work?

How does a CFD rollover work?

Reading time: 7 minutes

A CFD position doesn’t automatically close when the trading day ends. If a trader keeps a position open beyond the broker’s daily cutoff, an overnight rollover or financing adjustment may apply. Understanding how rollover works can help you see how holding a CFD position overnight may affect your trading costs.

What is a CFD rollover?

When a CFD is based on a futures contract, the underlying contract eventually approaches its expiry date. To allow the CFD position to remain open, the broker may roll it from the expiring contract to the next available contract. The timing of the rollover can take factors such as liquidity and trading volume into account, and brokers typically publish their rollover dates in advance.

For the trader, the rollover is generally handled automatically, meaning there is no need to manually close the existing position and open a new one. The process typically involves:

• Closing the exposure to the expiring contract
• Opening equivalent exposure to the next contract
• Applying an adjustment to account for the price difference between the two contracts and any applicable rollover costs

The price of the new contract may differ from that of the expiring contract. To account for this difference, the broker may apply a debit or credit to the trading account, depending on the direction of the position and the price difference between the two contracts. Any additional rollover fees or spreads depend on the broker and the specific CFD.

Interest rates, dividends and storage costs are among the factors that can influence the price difference between an underlying asset and its futures price, or between futures contracts with different expiry dates. These factors form part of what is known as the cost of carry. While price differences can sometimes be relatively small, they can be more significant in certain commodity markets.

Why CFD rollovers happen

To recap a common term, CFD stands for Contract for Difference. A CFD is a derivative contract that allows you to gain exposure to an asset’s price movements without owning the underlying asset. Your profit or loss is based on the difference between the opening and closing price of the CFD, subject to the contract’s terms and any applicable charges.

CFD rollovers can occur when a CFD is based on a futures contract that is approaching its expiry date. Futures contracts, including those underlying some commodity and oil CFDs, have a defined lifespan. If a trader wants to maintain the position beyond the expiry of the underlying contract, the broker can roll the position into the next contract. This allows the CFD position to remain open while the underlying futures contract changes.

Do rollovers cause a trader to lose money?

A futures CFD rollover is generally designed to account for the price difference between an expiring futures contract and its replacement contract, rather than treating that difference as a genuine trading profit or loss. However, brokers may apply rollover adjustments, spreads or other charges, so the exact cost of rolling a position depends on the broker and the specific instrument.

For example:

Underlying futures contract: Crude oil futures

Expiring contract price: $75.00 per barrel

Replacement contract price: $76.20 per barrel

Position: Buy 10 contracts

Contract size: 100 barrels per contract

Price difference: $76.20 − $75.00 = $1.20 per barrel

Contract value difference: $1.20 × 100 barrels × 10 contracts = $1,200

In this example, the replacement futures contract is priced $1.20 higher per barrel than the expiring contract. The broker’s rollover mechanism accounts for this $1,200 difference when moving the CFD position to the new contract.

The key takeaway is that the price gap between two futures contracts should not, by itself, be treated as a genuine trading profit or loss. Instead, the broker applies a rollover adjustment to account for the difference between the expiring and replacement contracts. The exact way this adjustment is reflected in the trading account can vary between brokers.

How rollovers can affect your trading

Here are some of the ways futures CFD rollovers can affect a trading position:

Cost

A rollover can result in an adjustment to your trading account, and brokers may also apply other charges or spreads depending on the instrument and their rollover policy. The impact can be more relevant for traders who hold positions overnight or through a futures contract’s expiry.

If a trader is unaware of an upcoming rollover, the price difference between the expiring and replacement contracts may affect the position and account balance. Checking the broker’s published rollover schedule can help traders understand when a contract is due to be replaced and how the adjustment is handled.

Strategy

The replacement futures contract may trade at a different price from the expiring contract. This can be particularly relevant for traders using tight stop-loss or take-profit levels, as the price difference may affect where their orders sit relative to the new contract.

Traders should check how their broker handles existing stop-loss and take-profit orders during a rollover and whether their order levels remain appropriate after the position is moved to the replacement contract.

Seasonality

Seasonal supply and demand patterns can influence the prices of some commodity futures contracts. These patterns may contribute to differences between contracts with different expiry dates, although other factors, such as interest rates, storage costs and expectations for future supply and demand, can also affect the futures curve.

The relationship between futures prices can change over time. For example, a market may trade in contango, where later-dated contracts are priced higher than the current contract, or backwardation, where later-dated contracts are priced lower. These conditions should not be interpreted as a reliable indicator of future price direction.

How to manage CFD rollovers

Understanding how rollovers work can help you anticipate potential adjustments and manage positions around contract expiry. Here are some practical points to consider:

Stay updated: Monitor your broker’s published rollover schedule and note the expiry dates of the relevant futures contracts. This can help you understand when a position may be moved to a replacement contract and when a rollover adjustment may apply.

Consider the costs: A rollover may involve a debit, credit or other adjustment to account for the price difference between the expiring and replacement contracts. Check your broker’s rollover policy and consider these potential adjustments when planning a trade.

Consider closing before expiry: If you do not want to hold a futures-based CFD through a contract rollover, you may choose to close the position before the relevant expiry time. This avoids the position being carried into the replacement contract, although closing a position can itself result in a trading profit or loss and other applicable costs.

Trade CFDs with FP Markets

Knowing the cost of keeping a CFD position open can make a significant difference in how you plan your trades. You may be holding a position overnight or testing your strategy across multiple sessions, but it nonetheless benefits you to understand the costs involved and trade with a reliable broker partner that puts transparent trading conditions within reach.

With FP Markets, traders can access a wide range of markets and trading platforms designed to support informed trading decisions. Explore CFD trading with a regulated broker and take a more considered approach to every position you open. Open a trading account with FP Markets today.