What Is a Must Be Filled (MBF) Order?

A must be filled (MBF) order is a trade that must be executed due to expiring options or futures contracts on those exchanges. Many MBF orders are filled on the third Friday of each month, at the market open, because many types of options and futures contracts expire on that day each month.

Key Takeaways

  • A must be filled (MBF) order is a trade that must be executed due to expiring options or futures contracts on those exchanges.
  • The MBF order lets the exchange know that the order needs to be filled in order to fulfill the obligation of an option seller.
  • An MBF order can also be used to fulfill the obligation of a futures contract for a buyer or seller.
  • MBF orders are often filled on the third Friday of each month, at the market open, since many options and futures contracts expire on that day.

Understanding a Must Be Filled (MBF) Order

Must be filled orders need to be put into the system by 5 pm (may vary by exchange) on the day before the expiration date. These orders are then filled at the opening price of options or futures exchange on the following day, which is the expiration Friday. Options and futures contracts are derivatives, meaning they derive their value from an underlying security, stock, or commodity, such as wheat.

Options give the holder the right to buy or sell an underlying security at a predetermined price—called the strike price—and expiration date. Futures contracts are more standardized than options, meaning they have set maturity dates and amounts for each contract, but also allow an investor to buy or sell the underlying asset at a set price and expiration date. Futures contracts can also result in the delivery of the underlying asset at the contract's maturity, such as in the case of a commodity.

However, an options contracts might also require the delivery of the underlying security, such as the shares of a stock.

Both futures and options can also be used to speculate on the price of the underlying and allow an offsetting contract to be booked against the initial contract at its maturity. The investor would realize a gain or loss between the buy and sale contracts.

Futures Contracts

The MBF order lets the exchange know that the order needs to fulfill the obligation of a futures contract for a buyer or seller. In a futures contract, there's a buyer and a seller to each transaction, meaning someone must fulfill the contract at its preset price and by the expiration date. If, for example, two parties are involved in a futures contract for wheat, one of the parties must deliver on that obligation (delivering the wheat), while the other party must deliver on the agreed-upon price for purchasing the wheat.

Selling Options

Options contracts have an upfront premium attached to them. The buyer of a call option, who wants the right to buy a stock, will pay the premium upfront for the right to buy the stock at the preset strike price for the contract. The buyer has the right to walk away from the contract and let it expire if it turns out that the market price of the stock is much lower than the strike price of the option. The buyer would merely purchase the shares at the prevailing price, which is lower than the strike.

However, sellers or writers of options cannot walk away from the obligation of an options contract. Since options have a premium attached to them, the option seller gets paid the premium upfront but gives up the right to exercise the option. The holder of the option or the buyer gets to exercise the option if the underlying stock price moves in the buyer's favor. The seller wants the stock price to move very little or in the seller's favor.

If the option moves in the buyer's favor and it's exercised, the seller is obligated to fulfill the contract by either selling their shares or buying shares from the buyer at the preset strike price of the contract. In return for this risk, the seller keeps the premium no matter what happens.

The must be filled order is part of the option selling process and is the realization that the contract's obligation needs to be fulfilled by the seller. The MBF order notifies the exchange that the order needs to be filled to fulfill the obligation of the option seller. Also, the MBF order requires that the entire amount of the order be filled.

Must be Filled Orders and Price Changes

MBF orders are treated as pre-market orders, which are placed the night before and then executed at the opening price. The orders themselves affect the opening price, just as any order that is executed on the open does. Buy and sell orders that come into the exchange to be executed on the open must be matched.

For example, if there are far more buy orders than sell orders (in terms of share volume), this will push the opening price up until there is adequate sell volume to satisfy the buy orders. On the flip side, a larger amount of sell volume will push the opening price lower. Imbalances between opening buy and sell orders are publicized to market participants who can then choose if they wish to add liquidity to reduce the imbalance.

The third Friday in March, June, September, and December is referred to as triple witching because stock index options, stock index futures, and stock options all expire on these days. With the introduction of individual stock futures, which also expire on these days, the term quadruple witching is also used.

Example of a Must be Filled (MBF) Order

For example, if a trader writes (or sells) 10 call option contracts on XYZ stock at $20, and XYZ stock is currently trading at $24, the buyer or owner of the option has a profit—called in the money. In other words, the buyer can exercise the option and force the option writer to sell their shares of stock at the $20 strike price. The buyer would likely sell those shares in the market at the prevailing price of $24 and realize a profit.

The writer will put out an MBF order for 1,000 shares (10 contracts x 100 shares) in which the writer is obligated to have 1,000 shares to deliver to the option buyer. As a result, an MBF order is used to make sure they have the shares on the expiration day.