Rollover and expiration days of futures contracts

It just happened that September 1st, 2006, was a Friday. (And for those who are interested in historical trivia, September 1st, 1939, the day WWII started, was also a Friday.) Why am I talking about it? Because September is a rollover month for many futures contracts, including very popular stock index eminis and whenever a rollover month starts on a Friday, a rollover day is on the first Thursday and not on the second one as is usually the case. I thought that pointing this out merits some attention.

Here are some other facts about the rollover and expiration days. The latter is always on the third Friday of a rollover month. For the instruments we are most interested in, that is eminis of the futures contracts traded on the Chicago Mercantile Exchange (CME) and the Chicago Board of Trade (CBOT), the months in question are: March, June, September, and December. There is a single contract letter associated with each month and, in the same order, it is: H, M, U, and Z. When we switched to the September contract on the rollover day, which happened to be on September 7th, we switched to trading the U contract.

The rollover day is the day most traders start trading the new contract, which also means that the trading volume shifts from the old contract to the new one. That does not mean that you have to switch to trading the new contract on that particular day as you can still trade the old one until the expiration day, but doing so on the rollover day makes a lot of sense. Otherwise, the longer you stay with the old contract the more your trading is going to be affected by the volume which is getting poorer and poorer the closer we are to the contract expiration.

Interestingly enough, December 1st will also fall on a Friday and so the rollover day will again be on the first Thursday of the month and not on the second one. You can easily check it using this lovely calendar. While this might look like a coincidence, it actually is not. There are some deeper reasons why this is so and can happen only to these two contract months. What this means, in particular, is that even if a March rollover day happened to be on the month's first Thursday, the next rollover would never be on the first Thursday in June. The same is true for the June-September sequence. In fact, using the same calendar, we find out that June 1st, 2007 falls on a Friday and thus the month's rollover day will be on the June's first Thursday. However, the next rollover day is on the second Thursday in September 2007.

You can learn why this is so from this Wikipedia article (see the section on "corresponding months").