Rolling, Rolling, Rolling.

You’ve heard of Shark Week. Well this is Rolls Week.

For the SFE bonds, this is when all the activity moves from the near expiry to the next. In this case, it is moving from Dec into March.

On CQG, you should be able to find the calendar spread for the Dec-Mar 3yrs and the 10yrs. Call them up and watch. There are massive amounts of volume going through. Some of it comes from funds and institutions rolling their longer term positions. Others are spec traders, essentially acting as market makers or trying to make a tick here and there.

Rolls week can be a confusing time if you are not aware it’s going on and particularly if you are watching time and sales in the nearby contract.

This is because of the way a trade on the exchange spread is settled. Let’s use an example. If you buy 10 lots in the Dec 3yrs at 97.38, your account will settle 10 lots at 97.38. That’s pretty simple. However if you buy 10 calendar spreads at say -0.03, your account will NOT show that calendar spread price. Instead it will settle the trade as individual trades in each contract at a differential of -0.03.

So buying a spread at -0.03 might see the trade settle as: buying December at 97.380 and selling March at 97.410. You can see the price differential is still -0.03 – the spread price you traded but what appears on your statement are trades in the individual legs.

The confusing bit for the new trader is these trades also appear on time and sales as individual trades. So you’ll be seeing big lots traded go through both the 10yrs and the 3yrs in time and sales, but never actually see them transact in the individual contracts. It’s like the trades just magically appear. It is because the transaction happened in the spread market, then settled in the individual markets.

Here is a snapshot of the 3yr bond market for Dec, March and the spread:

Here is a snapshot of the 10yr bond market for Dec, March and the spread:

In both the 3yrs and 10yrs, you can see a very large amount of volume is waiting on the bid and the offer. This simply means there are a lot of people wanting to roll their short or long positions from Dec to March.

So is the spread market tradable for small size? Yes it is, but it is rare to see a large move in the spread. In fact it can stick to an extremely tight range. As such, being able to scalp this market comes down to being in the queue ahead of the next guy.

Mechanics of a Roll Trade:

  • If you are long 10 Dec wish to roll that position to the next month, you would sell 10 spreads. This means you are selling 10 Decs and buying 10 March, leaving you net long 10 March.
  • If you are short 5 Dec wish to roll that position to the next month, you would buy 5 spreads. This means you are buying 5 Decs and selling 5 March, leaving you net short 5 March.

Other Things to Note about the Roll Period:

  • In the week leading up to expiry, the SFE 3yr bonds change to half ticks for both the near and the next contract expiry. Once the near contract expires, the next contract reverts to a full tick size. They do this so the cost of rolling a position is reduced. It keeps the institutions happy.
  • Each market approaches the roll period differently. For some markets, most activity is in the day or two before expiry. For others, it all happens weeks in advance. One determinant here is whether or not the contract is deliverable. If it is, most positions are rolled before the delivery period or “first notice day” rather than the expiry day. You’ll see it all play out in the volume and open interest for each contract.