Rollover, from Victor Niederhoffer

March 28, 2012 |

Having considered the rollover for many years, I conclude the best thing is not to roll over at all.

Bruno Ombreux agrees:

You are right. But that is if you have a choice. Sometime you have hedges that need to be rolled over. And it is not a choice you make. The hedges are a consequence of your underlying business, which is where you make the money. Then the hedges and the rolls are best seen as a cost, even if sometime they turn out a profit.

Gibbons Burke writes:

An alternative to creating a single continuous contract to model the behavior of a trading regime which may holds a position across contract deliveries (as this must be tested) is to test that model's behavior using individual contract histories as you would do in real time, rolling your position at the indicated times as necessary. If you need more history for your indicators than the new contract has, then you can create a back adjusted contract anew each time with the contract inn which you have the current position reflecting the actual prices at which that contract traded, but the historical data has values from earlier contracts. This minimizes the distorting effect of cumulative rollover adjustments that you get when you make one continuous series covering the entire testing period.

Rocky Humbert writes:

There is a paradox in this discussion. As a *theoretical* matter: I can own a cash position in something for X months/years (as a speculation, hedge or investment.) Or I can buy a future that expires in X months/years. If the p&l between the two is materially different (after taking account of leverage and financing), then this is a pure arbitrage.However, the arbitrage is problematic to exploit in physical commodities because of the logistics involved in owning and storing physical commodities. But the arbitrage should be easy to exploit in things like Stocks, Bonds, Gold, currencies, etc. The arbitrage CAN arise in the course of business precisely because hedgers, investors and speculators all have different motivations. But the arbitrageur will benefit from this dichotomy if his analysis is correct. Let's not fool ourselves: The RATIONAL ECONOMIC ARGUMENT MUST BE: the futures price is the BEST indication of where the price will be in the future. Whether that future is one month or 100 months. Any other interpretation leads to a break down in core economic principles. The rolls are simply a discontinuous manifestation of this phenomenon.

George Coyle writes:

I am sure this is flawed logic and welcome analysis/criticism, but all this talk has me thinking stocks are a more ideal vehicle for true trend following (vs futures). No rolling/transaction costs, potential dividend yield. You don't get the leverage and are probably subject to reg T on stocks but that may not be a bad thing.

Gibbons Burke adds:

Another reason stocks are less susceptible to trend following strategies relative to futures markets are laws forbidding insider trading. The prohibition on a profits from privileged particulars prevents their percolation into prices until promulgated publicly. The predictable result is that when new information is released, it is immediately reflected in the price, causing a quantum move to the new value level, a trend exploitable by only the extremely nimble, or knowledgeable scofflaws.

No such prohibitions prevent futures traders from trading on inside information. The market exists mostly for the benefit of insiders. When they act on information they have, with their fingers on the pulse of the fundamentals of the commodity supply situation, and the condition of crops, etc., that telegraphs that information into the price. As the information spreads, and more traders act on it, the trend to the new value level which reflects the full discounting of that new data. So, the speed with which valuable fundamental data about commodities futures markets gets integrated into price slowly enough for a trend to form in price which is more than just noise. This creates enough beyond-noise trends which makes a trend following system able to operate and squeeze a profit out.

The for trend followers problem comes when the number of trend followers swells, and they all pile onto the signal - the systems acting on smaller noisy trends create their own noise and the increased noise increases the risk to the point where the real trends based on real changes in the supply-demand situation are not big enough to overcome the cost of catching the smaller losing noisy trends for small choppy losses.

Comments

4 Comments so far

Zafer Abdul Rahman on March 29, 2012 12:54 am
It’s flawed logic, of course, but you did not disclose the options/choices you have prior to deciding your position - therefore, the thought invites analysis.

To roll over or to hold is a decision based on risk-versus-possible profit which may be viewed as an opportunity cost analysis supported by another strength, opportunity, utilisation and profit analysis as a contrasting tool.
vic on March 30, 2012 10:03 pm
it wasnt clear from the context , but the discussion is about the proper way to adjust for rollover with statistical data, algebraic or percentage. I say do neither. but of course the decision to hold or increase is relatively independent of the rollover date except for the well known tendency for bearishness a few weeks before the rollover date in certain markets. vic
douglas roberts dimick on April 6, 2012 8:13 pm
Two Queries

Victor,

First, by stating “not to rollover at all” do you mean…

(a) not to “reinvest the funds of a mature security” or

(b) not to “transfer the holdings” of one account or security class to another, or

(c) both of the above?

Second, is your rationale here focusing on the variation between spot price of a deliverable commodity and the relative price of the futures contract a la the given security’s basis (or purchase price after commissions or other expenses), being the cost or tax basis?

In effect, the past-present (trend-following versus swing) effects favoring a futures contract itself “become nullified” (in terms of risk transference per present-future money/risk valuation) upon a given rollover, thereby negating the value/benefit of such transference.

Is that what you are saying?

dr
Roger Tompkins on April 18, 2012 4:34 am
Actually, the idea is to change your trading vehicle. Forget futures. Stocks are OK for as long as whatever is being produced is relevant. But here’s the deal: I’m heavily short the Euro right now against the dollar. I can keep this position for six minutes, six hours, six months or six decades. I don’t need to roll anything. I trade spot currencies and within that market, trust me, everything is expressed — stocks, commodities, debt, politics, everything. When a currency trends it trends seriously, and of course the liquidity is unmatched.

Just a thought.

And, you know, the leverage can range from 1-1 to 50-1, your choice.

When that’s not going on you play squash, racquetball (me), ride a horse, kayak, sail or just whatever the hell.

It’s all good.

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