What is the 'rollover' strategy in futures trading?

The rollover strategy in futures trading involves closing a position in a near-expiration contract and simultaneously opening a new position in a longer-dated contract. This practice is common among traders who want to maintain their market exposure without taking delivery of the underlying commodity. As contracts approach expiration, they can lose liquidity and may become less desirable, hence the need to roll over to a new contract that has a longer time until expiration.

By engaging in a rollover, traders aim to avoid the complexities of contract delivery and maintain their market strategy. This is particularly important in a market where continuous exposure is needed, whether for speculation or hedging purposes. The strategy allows for the continuity of positions in the futures markets and can help manage risk associated with price fluctuations.

The other options do not accurately capture the essence of a rollover. Closing a position before delivery implies simply exiting the market, but does not necessarily involve transitioning to another contract, which is a core aspect of the rollover. Switching from one commodity to another describes a different trading action that does not focus on contract expiration. Investing based on historical trends refers to a strategy related to analysis, rather than the operational mechanics between futures contracts.