Rolling Hedge

What is a Rolling Hedge

A rolling hedge is a strategy for reducing risk that involves getting new exchange-traded options and futures contracts to replace expired positions. In a rolling hedge an investor gets a new contract with a new maturity date and the same or comparative terms. Investors take a rolling hedge position when a contract expires. The rollover process will change by the type of derivative product the investor is invested in.

BREAKING DOWN Rolling Hedge

A rolling hedge requires a hedged position to be in place before a renewal can happen. Rolling hedge positions are often used in alternative investment portfolios that integrate options and futures into their investment strategy. Options and futures can be used to mitigate the risk of huge price volatility and to profit from speculation potentially.

Hedging Contracts

Hedging contracts require greater due diligence than standard investments. Hedging products can not be transacted through all standard trading platforms and clearing houses. Therefore, investors must identify the specific type of instrument that accommodates their investing objective and identify the trading platform where the hedging product can be traded. Trading options and futures commonly requires a designated account or trading unit with specific parameters and margin requirements.

Contract Rollover

Once a hedged position has been established by an investor, renewing it is fundamentally a simple process. Investment in hedged products is often used by advanced investment professionals because of the extra costs and risks associated with hedging. An investor purchases an option or futures contract at a specified price and may likewise cause trading fees. Hedging products likewise have margin requirements. Margin requirements require an investor to deposit collateral for a portion of the investment they plan to make at the specified maturity date. Margin percentages differ and investors must keep collateral levels based on the changing value of the investment.

In a rolling hedge an investor seeks to keep the hedge position for their portfolio. In some cases, an investor must close the hedged position (likewise called "de-hedging") or settle collateral positions at expiration to roll the hedge with a new position. By and large the contract will have an automatic renewal which permits collateral positions to be ceaselessly maintained.

A rolling hedge permits an investor to keep up with their hedged position with a new maturity date in the event that their contract isn't exercised. A number of factors might be important for due diligence when a hedge is rolled. Some traders might seek to identify arbitrage opportunities that might happen around a contract's expiration date. In the event that a rolling hedge requires manual renewal, an investor's collateral position might be a consideration. Derivative contracts with automatic rollovers often see less price volatility at expiration. Contracts with automatic renewals likewise provide for simplified collateral management and margin maintenance. In some cases an investor might like to exercise options at expiration and enter into new contracts to keep the underlying position hedged for the future.

For examples and more details on rolling hedges for e-mini contracts see too: E-Mini.