Serial Option

What Is a Serial Option?

A serial option is a short-term option written on a futures contract that can be bought, yet prior to when the underlying contract has not yet been listed. Doing so can give them "first dibs" on the contract, at a locked-in price, when it truly does next open up — for the most part, in the following month.

Understanding Serial Options

To purchase a futures contract that is not yet accessible, they can buy a serial option for it. Assuming they exercise the serial option when the futures contract is listed available to be purchased, then they will claim that contract.

Standard option contracts are traded for a really long time where futures contracts lapse. Serial options are listed for quite a long time where there isn't an expiry of the underlying futures contract. A serial option expires before the underlying security comes to maturity. Exercising the option doles out the holder with a position of the nearby month futures contract. Typically, the underlying futures contract will lapse in the following month.

Most serial options are written for the next month following their purchase, thus a serial option trades just for something like 30 days or less. They typically begin trading five days before the expiration of a standard option contract or the current serial option contract.

How a Serial Option Works

This is the closely guarded secret: Say corn futures contracts (and standard options on those contracts) trade in July and September, yet entirely not August. The July standard corn option contract terminates Friday, June 19. So trading on the August serial option contract — the right to buy a September corn futures contract — would open on Monday, June 15. Its price would be founded on the September futures contract price.

Exchanges made the serial option to give commodity investors a chance to buy, and producers a short-term method for protecting the price of their product when a futures contract is inaccessible. Basically, an instrument allows hedgers to oversee short-term risk for a minimal price. Since the chance to expiration of a serial option is shorter than that of numerous conventional listed options, the serial option's premium is lower too. Traders can likewise utilize a serial option to broaden a hedge over time by rolling it forward.

Serial options are most common in commodities markets.

Illustration of a Serial Option

For instance, expect that a gold futures contract trades for February, April, June, August, October, and December. Thus, there is no listed gold futures contract for January, March, May, July, September, and November. A trader, seeking to hedge their exposure to gold for March, may be interested in purchasing a March serial option since there is an April futures contract accessible. This would give the trader the right to exercise the March serial option upon its expiration, which will put the trader in a position for the April futures contract.

It doesn't exactly make any difference what the underlying asset addresses, inasmuch as the price involved is addressed by a futures contract and doesn't mirror the spot market.

Special Considerations

Serial options became famous around the turn of the 21st century. The Chicago Board of Trade (CBOT), one of the leading commodities exchanges in the U.S., introduced them to its individuals in 1998.

Throughout the course of recent years, as futures contracts — especially for commodities — have become listed on electronic exchanges, gaps in contract months have generally disappeared. Simultaneously, options listed on a week after week or even daily basis have emerged in several markets. In such cases, the week after week or other shorter-term options have supplanted the serial options that expired in off months.

Features

• Serial option are intended to give hedging strategies when a futures contract is currently inaccessible.
• A serial option is basically a call option that gives the holder the right to buy a futures contract that will before long be listed.
• Since the chance to expiration of a serial option is shorter than for the vast majority conventional listed options, the option's premium is lower too.