Calendar Spreads and Roll Strategies

Futures contracts expire, requiring traders with ongoing exposure to periodically roll positions from expiring contracts to later-dated ones. Calendar spreads—the simultaneous trading of different expiration months—facilitate these rolls while also offering trading opportunities based on term structure views.

Definition and Key Concepts

What Is a Calendar Spread?

A calendar spread (also called a time spread) involves buying one futures contract expiration while selling another expiration of the same underlying:

• Long calendar spread: Long deferred month, short near month
• Short calendar spread: Short deferred month, long near month

The spread captures the price difference between expirations.

Roll Mechanics

Rolling a position means closing the expiring contract and opening a new position in a later expiration:

1. Close front-month position (sell if long, buy if short)
2. Open new position in deferred month (buy if long, sell if short)
3. Net P/L = difference between closing and opening prices

Spread Terminology

Why Term Structure Matters

The relationship between near and deferred prices determines roll economics:

How It Works in Practice

Rolling a Long Position

Scenario: Long 10 E-mini S&P 500 futures (ES) approaching expiration.

Current position: Long 10 ESH5 (March 2025) at 4,500.00 March settlement: 4,550.00 June contract (ESM5): 4,555.00

Roll execution:

1. Sell 10 ESH5 at 4,550.00 (close front month)
2. Buy 10 ESM5 at 4,555.00 (open deferred month)
3. Roll spread cost: 4,555.00 - 4,550.00 = 5.00 points

Roll cost per contract: 5.00 × $50 = $250 Total roll cost: 10 × $250 = $2,500

This $2,500 is the cost of maintaining long exposure for another quarter.

Trading Calendar Spreads

Spread quote: ESH5-ESM5 (March vs. June) If March = 4,550 and June = 4,555, the spread quotes at -5.00 (front minus back)

Spread trade (single order): Buy the spread = Buy March, Sell June Sell the spread = Sell March, Buy June

Trading spreads as a single order reduces execution risk versus legging each side separately.

Roll Timing Considerations

Key dates for equity index futures (ES):

• Roll typically begins 8-10 trading days before expiration
• Volume shifts to deferred month during roll week
• Last trading day: Third Friday of expiration month

Roll window liquidity:

Rolling early captures better spread liquidity; rolling late risks poor execution.

Worked Example

Annual Roll Cost Analysis: Crude Oil Futures

An investor maintains continuous long exposure to crude oil using front-month futures.

Market conditions (contango):

Quarterly roll analysis:

Q1 Roll (Jan to Apr):

• Sell CLG5 at $75.00
• Buy CLK5 at $76.65
• Roll cost: $1.65/barrel

For 100 contracts (100,000 barrels): Roll cost = $1.65 × 100,000 = $165,000

Annualized roll impact: If similar contango persists, four quarterly rolls cost approximately: $1.65 × 4 = $6.60/barrel = 8.8% of starting price

Comparison: Backwardation scenario

Q1 Roll:

• Sell CLG5 at $75.00
• Buy CLK5 at $73.50
• Roll gain: $1.50/barrel

Backwardation generates positive roll yield, enhancing returns for long holders.

Strategic Roll Timing

Active roll management:

Example: Spread trading opportunity

March-June crude spread:

• Current: -$0.60 (contango)
• Historical average: -$0.40
• View: Spread will narrow (less contango)

Trade: Buy the spread (long March, short June) If spread narrows to -$0.40: Profit = $0.20/barrel × 1,000 barrels/contract = $200 per spread

This is a relative value trade, not a directional oil bet.

Risks, Limitations, and Tradeoffs

Spread Volatility

Calendar spreads can move sharply due to:

• Supply/demand shifts affecting near-term contracts
• Storage cost changes
• Interest rate moves
• Seasonal factors

Spreads are often less volatile than outright positions but are not risk-free.

Execution Risk

Rolling as separate legs exposes you to slippage if prices move between executions. Spread orders mitigate this but may not fill in illiquid markets.

Roll Liquidity

Not all expiration months have equal liquidity. Rolling to distant months may incur wider bid-ask spreads.

Timing Risk

Delaying rolls to the last day risks:

• Poor liquidity
• Delivery obligations (physically-settled contracts)
• Position limit concerns (some limits tighten near expiration)

Common Pitfalls

1. Ignoring roll costs in performance: A commodity can appreciate while your futures position loses money due to contango roll costs.

2. Rolling mechanically without analysis: Sometimes it's better to close the position rather than pay expensive roll costs.

3. Misunderstanding spread direction: Buying the spread means long front/short back. Confirm before trading.

4. Trading illiquid back months: Deep deferred contracts may have poor pricing.

5. Forgetting delivery dates: For physical contracts, rolling too late triggers delivery procedures.

Checklist for Calendar Spreads and Rolls

• Identify roll window (typically 5-10 days before expiration)
• Check current spread levels vs. historical averages
• Assess contango/backwardation and implied roll cost
• Decide between leg trading vs. spread order
• Verify liquidity in target deferred month
• Calculate roll cost impact on total position
• Consider strategic roll timing based on spread view
• Monitor spread during roll window for opportunities
• Update position records with new contract month
• Adjust margin for any changes in contract requirements

Next Steps

To understand how spread positions receive margin benefits, see Spread Margining Rules.

For currency-specific rolling considerations, review Currency Futures for Hedging FX Risk.