Futures contracts have a defined lifespan, and understanding this can significantly affect your trading strategy and exit decisions. Two key aspects to keep in mind are expiration and rollover.

The expiration date of a futures contract marks the last day on which you can trade that contract. This usually happens on the third Friday of the expiration month but can vary depending on the specific contract.

Before the contract expires, you have three main options:

Closing your position is the most common and straightforward way to exit a trade. By doing so, you can realize any gains or losses without having to deal with the actual physical or cash delivery of the underlying asset.

To close a position, you execute an opposite transaction of equal size. For instance, if you are short two WTI Crude Oil contracts that expire in September, you would need to buy two WTI Crude Oil contracts expiring in the same month. The difference between your original trade and the close will determine your profit or loss.

Rollover refers to the process of shifting your position from an expiring contract to one with a later expiration date. Traders typically decide when to roll over by monitoring the volume of both the current and next contract months. When the new contract month’s volume reaches a certain threshold, traders may choose to switch.

To roll forward, you close your current position while simultaneously establishing a new one in the next contract month. For example, if you hold four S&P 500 futures contracts expiring in September, you would sell those and buy four new contracts expiring in December or a later month.

If you don’t close or roll your position before the contract’s expiration, the contract will go to settlement. This means you will be obligated to fulfill the terms of the contract. If you're holding a short position, this could involve delivering the underlying asset, either physically or through a cash settlement, depending on the type of contract.

Having a strategy for handling contract expiration and rollover is essential to effective futures trading. Your approach will directly influence the outcome of your trades, making it crucial to decide in advance whether you plan to close, roll over, or settle your positions.