In the Contract for Difference market, you may sometimes notice that the contracts are described as relating either to cash or rolling futures. So, what’s the difference and does it matter to your trading?
Each contract for difference is based on an underlying market. The usual assumption would be that it’s based off the cash price, so you want to buy something today for delivery today, the current price will prevail. On that basis, it’s a “Cash CFD” and something that would typically be seen with any currency pair.
However, a number of assets are more commonly priced in the futures market and oil is a great example of this. A whole raft of variables come into play here, from the grade or quality of the oil, to the location of delivery, but there’s also a date when the goods are delivered and the financial liabilities are settled between buyer and seller – that’s the point at which the contract expires. Contract expiry dates are defined by the exchange which provides the underlying market, with the next WTI crude (West Texas Intermediate) contract, or the May 2019 contract, expiring on April 18th 2019. As the next contract to expire, it’s also sometimes referred to as the “front month” contract, but with these assets you’re going to be trading a “Rolling Futures CFD”.
What that means however is when the contract reaches expiry, there are often unusual movements in the underlying price, so a rolling future CFD is subject to a different treatment by your broker when compared to a cash CFD.
To understand why this happens, we’ll look again at oil. In the underlying market, several contracts are being traded at the same time. The one most commonly quoted is front month, so right now that’s the May contract for settlement on April 18th, but other contracts running for many months into the future are also being traded in the underlying market, albeit with less liquidity the further you move into the future.
If there’s a sudden but temporary shortage in supply, the price of the front month (May-19) contract may start to rise. However, working on the basis that the supply disruption won’t last, the June-19 contract doesn’t show any abnormal behaviour. When the May-19 contract expires, any open rolling future CFD position will then be automatically transferred to the June-19 contract, but in the above situation there could be a significant adverse price movement.
As an example:
- May 19 contract expires at $60
- June 19 contract is trading at $55.
Any client holding open positions would therefore be subject to a rollover, so rather than ‘losing’ that $5 advantage, this would be reflected as a cash adjustment on the account. Similarly, if the expiring contract was trading below the value of the new contract, the adjustment would be reversed.
So in summary, the difference between a cash CFD and a rolling future CFD for most traders is minimal. The rollover point will however result in some potentially unexpected cash adjustments on account, the instrument may not be available for trading for a short period and care should also be taken to ensure that sufficient margin is available to cover such moves.