Futures based CFDs and contract rollover

Not every market has a spot price that can be quoted continuously. Crude oil has a price for delivery in a particular month at a particular place, not a single price for oil. Natural gas is the same, and so are the agricultural markets. What exists in those markets is a series of futures contracts, each with its own expiry, each trading at its own price, and a contract for difference written on one of them inherits that structure entirely.

The consequence is an instrument with a finite life. A futures contract stops trading on a stated date, so an instrument referencing it cannot continue past that date without being moved onto the next contract in the series. That move is contract rollover, and it is a scheduled operational event rather than a market movement.

Which instruments are written on futures 

Energy and agricultural contracts almost always are, because there is no continuously traded spot market to reference. Index contracts exist in both forms: a cash index contract references the index calculation itself and carries daily financing plus dividend adjustments, while a futures based index contract references the listed futures contract and carries neither. Gold and silver are conventionally quoted on a spot basis and are usually not futures based, though a firm may offer either.

Which basis a particular instrument uses is stated in its contract specifications, and it is worth reading because the two produce entirely different statement entries for the same market view. The specification also states the expiry and roll dates, which are the only dates in a CFD's life that are set by a calendar rather than by the holder.

What happens on the roll 

Two contracts in the same series rarely trade at the same price, so moving an instrument from one to the other produces a step in the quoted price. If nothing else were done, that step would appear as an instantaneous profit or loss on every open position, produced by an administrative action rather than by the market.

Firms therefore apply a cash adjustment equal and opposite to the step, so that the position's value is unchanged across the event. The two common implementations differ in presentation and agree in result: some firms close the position on the expiring contract and reopen it on the new one at the new price, posting the difference as an adjustment, while others keep the position open and adjust its opening price by the size of the step.

The net line states the design intention: the roll itself creates and destroys nothing. What it does do is change the price the instrument is quoted at, which is why a chart of a futures based instrument shows a discontinuity at each roll date unless it has been adjusted for the steps.

Contango and backwardation 

A futures curve is the set of prices across the series, and it has a shape. When contracts further out are more expensive than nearer ones the curve is in contango, and when they are cheaper it is in backwardation. The shape reflects the cost of holding the physical commodity to the later date, storage and insurance and financing, set against the value of having it now.

The shape decides the direction of every roll, and because rolls repeat, its effect on a position held across many of them is cumulative rather than occasional. A position on the side that gains from a rise, rolling repeatedly up a curve in contango, meets a debit at each roll. On a curve in backwardation the same position meets a credit at each roll. The position on the other side experiences the mirror.

This is the mechanism by which a long held futures based position can produce a very different return from the movement in the underlying market, and it is not a hidden charge. It is the price of holding exposure to a commodity that has to be stored, expressed through the shape of a curve. The size of the effect depends on the steepness of the curve, and over a period of months in a steep market it can exceed the price movement entirely.

Which contract, and when the roll happens 

Firms roll onto the next contract carrying meaningful open interest rather than simply the next by date, because liquidity migrates from one contract to the next some days before the first expires. Rolling too early leaves the instrument referencing a contract the market has not moved to yet, and rolling too late leaves it referencing one the market has already left.

The roll date is published in advance in the instrument's specifications, usually several days before the underlying contract's last trading day. Around it, the expiring contract's liquidity thins as participants move on, so the days immediately before a roll are among the wider spread periods in a futures based instrument's cycle.

Where an instrument is allowed to run to expiry rather than being rolled, open positions are closed at the settlement price of the expiring contract on the stated date. That is a closure on a schedule set by the contract, and it is one of the two cases in which a CFD ends without either party choosing to end it.