What Is a Wild Card Option?

A wild card option allows the seller of Treasury bond futures to define if they will enable the short position commodity delivery after regular trading hours. A futures contract is a contract made when a holder agrees to buy or sell an asset for a set price at a specific date in the future.

A futures contract is a promise to buy or sell the asset, quite literally, in the future. A wild card option allows the seller of that contract to lock-in a price, even if the price should drop in after-hours markets.

The Chicago Board of Trade (CBOT) introduced Treasury Bond futures in 1977.

Key Takeaways

  • A wild card option is an option connected to treasury bond or note futures contracts that lets the short position hold off on the delivery of the commodity until after regular trading hours.
  • The wild card option gives the seller the right to hold off on settling a contract and wait for a better price to emerge after the futures market closes.
  • When the seller has a wild card option, they can secure a price on the option, even if the price ends up falling in after-hours trading.

Understanding a Wild Card Option

The function of wild card options in connection with Treasury Bonds is easier to understand if you know how future contracts are written. Futures write within the time frame of the CBOT's Treasury Bond Futures Contract timeframe.

The futures market closes at 2 p.m., but sellers in the short position are not required to declare an intent to settle their contracts until 8 p.m. An investor might choose to short a futures contract at, or before, 8 p.m. Chicago time after the exchange has closed when setting the futures settlement price.

This feature allows the seller to wait, in case the bond prices change favorably between 2 p.m. and 8 p.m. The six-hour window gives the investor a wild card option where they may try to sell at a more favorable price, even after-hours. The wild card option occurs on every trading day of the delivery month for the short position investor.

This provision allows the short futures contract holder to announce their intention to deliver the underlying securities. Delivery may be on any notice day before a specified time. The specified time is after regular trading hours, in which fixing of invoice prices is complete. The delivery of the security is usually the cheapest on that specific day.

Monthly Wild Card Options

There is also a monthly wild card option. The end-of-the-day wild card option lets the contract price of a Treasury bond futures contract be set at 2 PM Central Standard Time and allows the short futures to wait until 8 PM before declaring an intention to deliver.

An end-of-the-month wildcard option, however, lets a settlement price for a Treasury bonds futures contract to be set seven days before the end of the contract month and allows the short futures to wait until the end of the month before delivering. A short, or short position, is a directional trading or investment strategy where the investor sells shares of borrowed stock in the open market.