Bill over at NoDooDahs was asking in a comments thread below about when it is prudent to roll your position from one contract to the next.The basic answer is to know when the notice period starts (for physical delivery contracts) or to otherwise keep an eye on open interest and volume.
We have an example occuring at the moment in Cotton, and it helps to see the charts to see exactly what is happening. The 1st notice day for Dece
mber delivery is November 22, as detailed at the NYBOT. So any speculative traders not intending to participate in delivery had better be out of the December contract by then. We can see in the charts that this is already occurring.Open interest in the March contract has now overtaken OI in the Dec and for all intents and purposes, March is now the spot contract. Traders are either starting to roll out now, and/or initiating any new positions in the March contract instead.
For a trader, liquidity is paramount in avoiding slippage as much as possible, therefore you wouldn't want to let volume and OI dry up too much before rolling out. It's a judgement call that can be affected by when you anticipate exiting the trade. If an exit is imminent for whatever reason, you wouldn't want to be flipping contracts and incurring costs for no benefit.
If I was in a position trade in the Dec contract here, and anticipated holding the position for a bit longer, I would be looking to roll out at any time now. The exact timing is not usually of any consequence in this situation.
Interestingly, cash settled contracts OI behave the same way. Dec Lean Hogs, a cash settled contract, trade right up till the 14th of December (more than a month left to trade), yet the Feb contract now has higher OI (see charts here). Obviously a close eye on OI and volume is requires here also.
