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. MBF orders are exempt from short sale rules.
Breaking Down the 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.
The MBF order lets the exchange know that the order needs to filled in order to fulfill the obligation of an option seller, or to fulfill the obligation of a futures contract buyer or seller. MBF orders require that the entire amount of the order be filled.
Must be Filled (MBF) Order Example
For example, if a trader writes 10 uncovered call contracts on XYZ stock at $20, and XYZ stock is currently trading at $24 (the owner of the option is in the money), the writer will put out an MBF order for 1000 shares (10 contracts x 100 shares). The writer of the contract is obligated to have 1000 shares to deliver to the option buyer, therefore, they use a MBF order to make sure they have the shares on expiration day.
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 order 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.