Assume the market in this example is used by sophisticated hedgers and speculators.

The hedger
needs to transfer risk. If exposure to risk will continue after the expiration ofthe June contracts, the
hedger's position must be rolled into the next month. The astute speculator, desiring to maintain a
market view, also would roll positions forward. Rolling from one expiration month to the next is best
accomplished by a spread order. Assume the hedger is short in futures to protect the long "cash"
market inventory and the speculator is currently long in futures and desires to continue with a
bullish view. Spread orders for each trader would look Iike the examples in Figure 5-2. In a mature
market, the level of total open interest can be expected to remain unchanged during an orderly
expiration cycle. The shape of the sequential expirations would resemble that shown in Figure 5-3.
At any point in time, the summation of all the open-contract open interest (and volume) should be
plotted on the chart. Applications of the principles of a healthy price trend then become feasible.

ACTUAL OBSERVATIONS

A perfect market does not exist. In reality, most plots of total open interest do record a drop as
maturity of the nearby contract approaches. Specific contract specifications create unique and
observable shapes to the open interest curve. There is a distinct difference in the shape of the open
interest plots in physical-delivery contracts versus cash-settled contracts. Generally, an orderly roll