Serial Option
Contents
Unlocking the Potential of Serial Options in Futures Trading
Exploring Serial Options: A Primer
In the realm of futures trading, serial options serve as short-term options tied to futures contracts that have not yet been listed. Investors utilize serial options to secure 'first dibs' on a contract at a predetermined price once it becomes available, typically in the following month.
Understanding Serial Options Dynamics
- Call Option Analog: Serial options function akin to call options, granting the holder the right to purchase a futures contract soon to be listed.
- Strategic Hedging: These options are designed to facilitate hedging strategies when futures contracts are temporarily unavailable.
- Premium Dynamics: Due to their shorter expiration period compared to standard options, serial options command lower premiums.
Deciphering the Mechanics of Serial Options
Investors seeking to acquire futures contracts not yet available can opt for serial options. These options expire before the underlying security matures, with exercising them resulting in ownership of the nearby month's futures contract, typically set to expire the following month.
Illustrative Example of Serial Options
Consider a scenario where gold futures contracts are available for February, April, June, August, October, and December, leaving gaps for the months in between. A trader looking to hedge gold exposure for March might purchase a March serial option, entitling them to the April futures contract upon expiration.
Special Considerations and Evolution
Serial options gained popularity in the late 20th century, with the Chicago Board of Trade (CBOT) introducing them in 1998. However, as electronic exchanges have proliferated and shorter-term options emerged, the prominence of serial options has waned, replaced by weekly or daily options.