Let us assume that you are positive on Tata Steel due to a further up-tick in steel prices globally. As a result, you have bought March futures of Tata Steel and you intend to hold it till expiry. Before the expiry the stock moves up by Rs.20 but then your view is that stock price has the potential to go up further. What are the options in front of you? As a holder of a long position in futures there are 3 options in front of you as under..
You can opt to book profits in the March Tata Steel Futures by selling the futures of equivalent quantity and closing out your position. You can book your profits and take it away.
Alternatively, in cases where the liquidity in the futures market is very weak you can opt to just let your futures expire. On the settlement date (last Thursday of the month) the difference between the closing price and the purchase price will be automatically credited to your trading account.
As a third alternative, you can also opt to roll over your long futures into the April contract. Basically, you sell your March Tata Steel Futures and simultaneously buy April Tata Steel Futures. This called a long roll and entails a roll cost. We shall look at this roll cost in detail later
Understanding the concept of cost of long roll over..
Let us assume that your bought March Nifty Futures at a price of 10,386 on Feb 20th. As of the close on February 23rd the Nifty is quoting at 10,507. That means the Nifty will yield you a profit of 121 per unit of Nifty. Assuming the current Nifty lot size of 75 units, you are sitting on a notional profit of Rs.9,075 (121 x 75). If you are still positive on the upward movement of the Nifty you can also choose to roll over to the April month contract. Look at the chart below..
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