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. Contract Month

    The contract month is the month in which a futures contract expires.
  2. Listed Option

    A listed option is a derivative security traded on a registered ...
  3. Currency Option

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

    The far option in a spread trade is the option with the longer ...
  5. Exotic Option

    An exotic option is more complex or has a different structure ...
  6. Exercise

    To put into effect the right specified in a contract. In options ...
Related Articles
  1. Small Business

    Serial Entrepreneurs Venture And Venture Again

    Serial entrepreneurs start up a venture, sell it, and start another one, and they often benefit from their previous experiences.
  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

    Getting acquainted with options trading

    Learn about trading stock options, including some basic options trading terminology.
  4. Trading

    A Quick Guide To Debt Options

    Options on debt instruments provide an effective way for investors to manage interest rate exposure and benefit from price volatility, learn more today.
  5. Managing Wealth

    Build Your Wealth Like a Serial Entrepreneur

    Investing wisely is one way to build wealth. But serial entrepreneurs are rethinking the way they build their portfolios.
  6. Trading

    Futures and Options: How Are They Different?

    Options and futures may sound similar, but they are very different. Futures markets are a bit simpler to understand but carry a greater risk for investors.
  7. Trading

    Examples Of Exchange-Traded Derivatives

    We look at some of the most common exchange-traded derivatives.
  1. What are common examples of Serial Correlation in finance?

    Take a deeper look at serial correlation in finance, and find out why most attempts at discovering serial correlation among ... Read Answer >>
  2. When holding an option through expiration date, are you automatically paid any profits, ...

    Holding an option through the expiration date without selling does not automatically guarantee you profits, but it might ... Read Answer >>
  3. 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 >>
  4. What occurs when a security meets 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 >>
Trading Center