# Cost of rolling futures contracts

Futures are traded on margin, so that the P&L of any open position is realized on the posted margin. To maintain a constant exposure to the future, an expiring contract needs to be rolled into a new contract. I have read that the cost of doing this (using a calendar spread for example) is just the difference between the prices of the two contracts. I don't see why this is the case - all the P&L on the original position would have been realized at the time of rolling, so why would we need to pay or gain the difference between the two contracts?

Additionally, am I correct in understanding that a backadjusted price series does not take into account the cost of rolling? I.e. to get a proper account of a trading strategy backtested on this data, we would need to add in the cost of rolling (plus other costs).

Personally I hate the term "roll cost" and prefer "roll yield" or "effect of rolling". It is not really an out of pocket cost (it involves no outlay or receipt of cash).

It has to do with contango and backwardation. When you close the contract that expires soon, it is priced close to Spot, but the new contract that you enter into may be priced above or below Spot.

The difference between backadjusted and unadjusted prices is a measure of the roll effect.

For example the current S&P future SPM6 was 2028.60 on March 24, 2016 (adjusted and unadjusted); a year ago on March 24, 2015 SPM5 was 2084.90 (Actual) and 2052.60 (Adjusted). Therefore the person who rolled futures experienced a price move of -24.00 points, while the raw unadjusted price of nearby futures dropped -56.3. The difference between these two or +32.30 is the "roll effect", the - in this case positive - effect of rolling.

• So on March 24, 2014, SPM5 was at 2084.90 and SPU5 was at 2052.60? And by nearby futures you mean to say the futures beyond SPU5 (i.e. SPZ5 etc.)? – Comp_Warrior Mar 28 '16 at 23:44
• On March 24, 2015 SPM5 (as printed for example in the Wall St Journal for the next day) was 2084.90, when I use a service that provides backadjusted continuous future prices however I get a price of 2052.60 for that same contract. the difference is caused by 4 rolls that took place since then M5->U5, U5->Z5, Z5->H6 and H6->M6. – noob2 Mar 30 '16 at 14:46
• Ok, but why do you say this is a benefit of rolling? As you mentioned, there is no outlay/receipt of cash. – Comp_Warrior Mar 30 '16 at 15:15
• Ok, let's call it "positive roll effect". I am just trying to say that in this particular case it is a positive number. Could be neg also... – noob2 Mar 30 '16 at 17:24
• I guess I am saying, why is it a 'benefit' when there is no actual monetary gain? – Comp_Warrior Mar 31 '16 at 17:30

There is a cost for the roll because there is a value to the extended maturity that you are picking up. There will be dividends and a cost of carry for the hedger who is selling it. An index arb desk will look at the roll and decide to bid or offer depending on where they can carry the underlying basket. That dictates the prices of the rolls.

Right now ESM6/U6 is -8 x -7.95, so that means that you can buy the Sep for a 7.95 discount. That's because the person selling you that roll is going to expect to collect dividends $\$10.5$in divs. The market must be expecting to pay about$\$2.5$ in carry for the stocks to make it all arbitrage-free.