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.

  1. Expiration Date (Derivatives)

    The expiration date of a derivative is the last day that an options ...
  2. Options On Futures

    An option on futures gives the holder the right, but not the ...
  3. Currency Option

    A contract that grants the holder the right, but not the obligation, ...
  4. Listed Option

    A listed option is a derivative security traded on a registered ...
  5. Gold Option

    Gold option gives an investor the right to buy or sell gold bullion ...
  6. Roll Forward

    Roll forward is closing a shorter-term derivative contract and ...
Related Articles
  1. Trading

    A Quick Guide To Debt Options

    A look at trading options on debt instruments that include U.S. Treasury bonds and other government securities.
  2. Trading

    Trading Options on Futures Contracts

    Futures contracts are available for all sorts of financial products, from equity indexes to precious metals. Trading options based on futures means buying call or put options based on the direction ...
  3. Trading

    Stock Futures vs. Stock Options

    A quick overview of how stock futures and stock options work and why you would pick one over the other depending on the strategy being used.
  4. Trading

    Option trading strategies: A guide for beginners

    Options offer alternative strategies for investors to profit from trading underlying securities. Learn about the four basic option strategies for beginners.
  1. Can an option be exercised on the expiration date?

    American options can be exercised up to and including the expiration date but European options can only be exercised on the ... Read Answer >>
  2. What happens when a security reaches its strike price?

    Learn more about the moneyness of stock options and what happens when the underlying security's price reaches the option ... Read Answer >>
Hot Definitions
  1. Portfolio

    A portfolio is a grouping of financial assets such as stocks, bonds and cash equivalents, also their mutual, exchange-traded ...
  2. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  3. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
  4. Intrinsic Value

    Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
  5. Current Assets

    Current assets is a balance sheet item that represents the value of all assets that can reasonably expected to be converted ...
  6. Volatility

    Volatility measures how much the price of a security, derivative, or index fluctuates.
Trading Center