For a day trader, I think it makes sense to always trade the front month on a new trade or roll-over. What if the trader wants to trade the stock index futures on a longer term period? He does not know how long to hold as it depends on the market performance. What criteria would elite traders suggest that he use for choosing the month to trade? Choosing the front month may result in higher rollover cost. Would 6 months away be good to reduce rollover cost? Would it be a good idea to look at backwardation/contango conditions?
Index future monthly difference is based on interest and dividend flows. If you want to hold a future for 3 to 6 months, just trade one out that far. If you are just trading a few, the market should be tight. If you had to roll, and you are only trading a few contracts, the cost is just not that much.
Thanks. If I am trading only a few contracts, does it make sense to simply buy the front month since the roll-over cost is low? There is a risk of forgetting to roll over if one has to roll over every month, though.
Why would you forget? If you did, they are cash settled. Have you ever stayed long/short a few futures for more than a week?
I have never bought a futures contract before because I am terrified of the leverage. I am primarily a stocks only guy. I intend to try out futures soon. So, for stocks index futures, it seems like nothing serious happens if one forgets to roll-over as they are cash settled. Hmm ... wouldn't it be a better idea to let the contract expire and cash settle by itself? This way, I can save the commission of closing the contract. If I roll over, I have to close, then initiate a new contract. EDIT: I just realized something. If the futures moved in my favor on the day of settlement, I will miss out on the movement.
You are talking about the cost of a large coffee. You should base your entry and exit on other Parameters.