Delivery Option

What Is a Delivery Option?

A delivery option is a feature added to some interest rate futures contracts. The delivery option permits the option seller to determine the timing, location, quantity, quality, and the trump card features of the underlying commodity, which is set to be delivered. Delivery option terms are stated in the delivery notice.

Figuring out Delivery Option

Interest rate future options oftentimes contain delivery options. Delivery options make future contracts confounded, and traders need to altogether see all parts of the deal. All futures contracts are between a seller, known as the short, and the buyer, known as the long. The delivery option frames different methods for the seller to deliver the underlying security. The buyer might expect extra risk due to the seller's flexibility on delivery.

The Chicago Mercantile Exchange (CME) acts to assign a clearing firm to the futures contract traded on the Chicago Board of Trade (CBOT). Treasury bond future options are the most actively traded contract in the United States. The majority of exchange-traded options are American-style. An American option permits exercise whenever during its life. American options permit option holders to exercise the option whenever before and including its maturity date. Interestingly, European options permit exercise just at maturity.

Components of Delivery Options

At settled upon points, during the futures contract, the seller might pursue choices that will influence the delivery upon expiration. The CME gives data on the rudiments of Treasury futures Delivery options, basis spreads, and delivery tails:

• American-style options might contain the timing of delivery or the carry option. In this feature, the short might choose the hour of surrender as long as it falls inside the contract period terms. On occasion the seller might wish to hold the securities for coupon payment in the event that there is a positive carry.
• The quality option is a type of rainbow option which permits the seller to deliver any Treasury bond with no less than 15 years to maturity or call date. The seller will pick a bond with the least coupon rate accessible. This feature is known as cheapest to deliver (CTD), which permits delivery of the cheapest security to the long situation to fulfill the contract particulars.
• The accrued interest option gives the seller the right to deliver the bond on any business day of the delivery month, and that means they can follow short-term interest rates throughout the span of the month to yield the best deal.
• The trump card option awards sellers the right to deliver the bond up until 8 pm Chicago time on the last delivery day. That could be critical on the grounds that the price sets at the close of trading, 2 pm, and the spot market trading keeps trading until 8 pm, meaning the seller could exploit spot market trading shifts.
• With the finish of-month option, the seller has flexibility in determining the most advantageous sale day. That is on the grounds that the settlement day for contracts is the 8^th-to-last business day of the month. With that price locked in, the seller with a finish of-month option has seven more business days to determine assuming prices are moving up or down. During the finish of-month period, the futures contract won't answer market price changes.