Rollover - dealing with adjustments for systems

[fader]

how does everyone deal with the adjustments on futures charts/data on rollover days - today is expiration of the dax future and the new contract is 25pts+ above the expiring one - i am adjusting for this difference to get my price level bearings for the day... - somehow this has not been a major issue for me until recently.

i am wondering, for people who test and trade trading systems - i know there is continuously adjusted data available, for example, i also know that some people work off cash index levels - but for live system trading, how are these adjustments made in practice - if your system runs off the futures price, not cash, and if it uses yesterday's levels, for example, do you add/subtract the old/new contract differential at the opening on the rollover day? how do you back adjust (or forward adjust) the charts?

i searched for a thread on this and couldn't find any, if there is one, would someone pls post a link, thx.

 

[nimrod]

There are as many different ways of dealing with rollovers as there are contracts and traders. Personally I am wary of trading any contract on expiry day at all.

The US e-minis volume shifts to the new contracts a full 6 trading days before expiry as a matter of established convention - so much so that there are brokers who will limit your trading on the expiring contract to closing existing positions only. Here in Europe it is different - expiry day tends to be a free-for-all where the inexperienced are likely to get badly burned. You only have to look at the FTSE100 June expiry to see what I mean. The contract settlement price was about 35 points higher than that reached by the cash index all day - and for a further two weeks! There is so much ducking and diving going on by large players with vested interests in the contract settlement being above or below the cash index (ie open positions that must be closed or settled) and with enough clout to move the underlying market during the settlement auction, that normal charting TA becomes pretty well useless IMHO.

That's not to say that you cannot do a bit of spread trading between the two contracts in the run up to expiry - but doing so any closer than a couple of hours before expiry (ie on expiry day itself) is recipe for a serious lesson in the futility of trying to fart against thunder - again IMHO

 

[fader]

nimrod - thx for the insights, interesting about the ftse, i read about the big squeeze on the t-bonds (was it t-bonds or notes?) back in june but not heard about the ftse - the dax order book for the december contract was thin with only small single digit sizes showing at all levels right at the open today, seemed like it was wiggling all over the place at the start of the session... it's thinkened up since and looking normal as we're making this move up now.

i am however a bit more interested in the pratical side of dealing with software and numerical adjustments with respect to the rollover - it's interesting to hear that quite a few people don't trade at all on the rollover day or even the whole rollover week - if you take as an example last week's expiration in the U.S. index futures, not trading the whole week would have been potentially a significant opportunity cost if one follows momentum type trading strategies, for example.

 

[nimrod]

Hi Fader

The US index futures didn't expire last week. It's just that, unlike the European futures contracts, volume moved to the December contracts last Thursday. From then on open interest on the September contracts began to decline as positions were progressively liquidated. The september contracts actually expire today, so it's today that I personally will be very wary of on the US December contracts.

I can't help much with the charting techicalities of dealing with the rollover/expiry. I personally always keep a weather eye on the cash indices when trading but also the forward contract as expiry of the current one looms. Normal rules do not apply and it takes a day or two for them to settle down again.