Monday, September 12, 2016

Rollover, Z16

Migrating Elephants - Contract Rollover

A few years ago, Chris Mullaney explained to the room about a group of pit traders that would show up around contract roll over time and perform what Chris would refer to as Contract Spread Treading - Transferring positions from the contract soon to expire and into the next.  Chris would go on to say that these Spread Traders would cause the market to make all sorts of zany moves through out the day that often wouldn't make sense (I assume making sense for the established pit trader).   I asked my instructor Dan about these Spread Traders during rollover and from what I understand, with the shift towards around the clock electronic trading, Spread Trading between the two contracts takes place continually these days (as opposed to the transition period Chris was referring to back in the days of the Pit).  Before this enlightenment, I had thought contract rollover was simply a formality of updating our trading platforms...

One thing I observed was around rollover, the market would have daily ranges waaaaay beyond the average which would reckon being the longer term traders covering their range they wish to maintain.   For a day trader, we like extended daily ranges....

Several have written about when longer term traders show up in the room (Dalton, Williams,   They trade in huge lot sizes, they are serious about moving from one price location to another and they can care less on who they step on along the way.    These elephants often ignore visual indicators  laid out with such care by the short term brokerage houses (such as globex high/lows, value areas) and instead tend to migrate across the plains to a location usually traded way back earlier in the quarter that hadn't been visited in a couple moons.   As a trader, I've set up volume filters that start chirping when large lot sizes start appearing, that the elephants have arrived.

Friday, we clearly had a day when the elephants (long term traders) showed up and marched prices waaaaaay down back to prices that hadn't been seen for months.   This morning, price made one quick visit down low during the premarket before its slow march back up to last Thursday's value.    This was a perfect buying dip assuming there were some equities of value worth buying.

Also see Triple Witching, Quadruple Witching....

"Rollover day is when we switch from trading the contract that will expire this quarter to the contract that will expire the following quarter....  The futures contract that we focus on (the e-mini S&P500 or ES) expires on the third Friday of the months of March (H), June (M), September (U) and December (Z). The rollover days, however, are 8 days before expiration on the second Thursday of each of these months. These months have the letter designations H, M, U, and Z.

There are (allegedly) pit traders that just specialize in the days around rollover. They only trade these days (I have no idea what they do for the other 10 weeks in between rollovers but this is what I've been told) and they trade the widening spread in the expiring contracts. For whatever reason there are longer term traders that don't close out and roll their contracts at the optimum time. These rollover "specialists" will make a market (at a wider than normal spread) in the expiring contract and (apparently) make a very good living out of the rollover process." from