DEFINITION of 'Serial Option'

A serial option is a short-term option on a futures contract in which the underlying expires in a forward month. Therefore, in a serial option, the option expires before the underlying security comes to maturity. Exercising the option places the holder in a position of the nearby month futures contract. Usually, the underlying futures will expire in the following month.

A serial option allows investors to buy an option on a futures contract in a month when the futures contract itself is not available. For example, an investor may want to buy a futures contract on the S&P 500 index in February, but the contract is not for sale until March. If the investor buys a serial option on that futures contract and then exercises it in March, the investor will own the contract.

BREAKING DOWN 'Serial Option'

Serial options are created for months without an expiring futures contract, and is most common in commodities markets. Most serial options are written for the next month following the option's purchase, and so a serial option trades only for only about 30 days or less. Exchanges created the serial option to provide commodity investors and producers a short term way to hedge their investment when futures were unavailable, and so it filled that gap. Traders can also use a serial option to extend a hedge from one month to the next by rolling it forward. Because the time to expiration of a serial option is shorter than for many conventional listed options, the option's premium is lower as well.

Over the past few years, as futures contracts have become listed on electronic exchanges, gaps in contract months for commodities futures contracts has largely disappeared. At the same time, options listed on a weekly or even daily basis have arisen in several markets. In such cases, the weekly or other shorter-term options have replaced the serial options that expired in off months.

Example of a Serial Option

For example, if there is no gold futures contract available in March, a trader might be interested to purchase a March serial option in order to hedge his or her position in gold. Assuming there is an April futures contract available, exercising the March option upon its expiration will put the trader in a long position for the April futures contract. It does not really matter what the underlying futures contract represents, so long as the underlying is a futures contract and not the spot market.

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