What is a Serial Option?

A serial option is a short-term option on a futures contract that trades for the months when the underlying futures contract is not listed for sale.

Key Takeaways

  • A serial option is a short-term option on a futures contract that trades for the months when the underlying futures contract is not listed for sale.
  • Exchanges created the serial option to provide commodity investors and producers a short-term way to protect the price of their product when a futures contract is unavailable.
  • Since the time to expiration of a serial option is shorter than for many conventional listed options, the option's premium is lower as well.

Understanding Serial Options

A serial option allows investors to buy an option on a futures contract in a month when the futures contract itself is not available. So, if an investor wants to buy a futures contract on a commodity in a month when it not listed for sale, they can buy a serial option on that futures contract and, if they choose to exercise it in the month when the futures contract is listed for sale, then they will own that futures contract.

Serial options are created for months where there is not an expiry of the underlying 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. A serial option expires before the underlying security comes to maturity. Exercising the option assigns the holder with a position of the nearby month futures contract. Usually, the underlying futures will expire in the following month.

Exchanges created the serial option to provide commodity investors and producers a short-term way to protect the price of their product when a futures contract is unavailable. Essentially, it is a tool that lets hedgers manage short-term risk at a low cost. Since the time to expiration of a serial option is shorter than that of many conventional listed options, the serial option's premium is lower as well. Traders can also use a serial option to extend a hedge from one month to the next by rolling it forward.

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, assume that gold futures contract trades for February, April, June, August, October, and December. So, 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, might be interested in purchasing a March serial option since there is an April futures contract available. 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 does not really matter what the underlying futures contract represents, so long as the underlying is a futures contract and not the spot market.