Adjusting Futures Roll Gaps in Continuous Price Series
Summary
Futures contracts expire at different times, and adjacent contracts can trade at different prices. Joining them without adjustment creates artificial jumps that may be mistaken for signals by a trading model. The note explains how cumulative roll gaps can be used to construct a continuous series that accounts for these differences.
It describes selecting observations for the nearest contract, calculating absolute or relative roll gaps, then subtracting or dividing those gaps from prices. An S&P 500 E-mini futures example illustrates the workflow, but the underlying data are proprietary and no numerical comparison is reported. The note also distinguishes adjusted prices for simulated P&L and mark-to-market from raw prices for position sizing and capital use. Adjusted series can become negative, so they should not be treated as actual tradable prices.
Key ideas
- Unadjusted futures rolls can create price jumps that models may misread as tradeable signals.
- Cumulative roll gaps can be used to adjust a continuous futures price series.
- Absolute adjustments subtract roll gaps, while relative adjustments divide by them.
- Rolled prices support P&L simulation, while raw prices remain relevant to sizing and capital consumption.
- Adjusted futures prices can become negative and do not necessarily represent executable prices.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.