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.

BREAKING DOWN '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 future market closes at 2 PM, but sellers in the short position are not required to declare an intent to settle their contracts until 8 PM. An investor might choose to short a futures contract at, or before, 8 PM 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 PM and 8 PM. 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 that 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 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.

RELATED TERMS
  1. Wild Card Play

    Having the right to deliver on a futures contract at the last ...
  2. Delivery Option

    A delivery option permits the seller of a futures contract to ...
  3. Options On Futures

    An option on futures gives the holder the right, but not the ...
  4. Best To Deliver

    The security that is delivered by the short position holder in ...
  5. Futures

    A financial contract obligating the buyer to purchase an asset ...
  6. Bond Futures

    Bond futures are financial derivatives which obligate the contract ...
Related Articles
  1. Trading

    How to Trade Options on Government Bonds

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

    Beginner's Guide To Trading Futures

    An in-depth look into what futures are, and how you can build a solid base to begin trading them.
  3. Trading

    The Difference Between Forwards and Futures

    Both forward and futures contracts allow investors to buy or sell an asset at a specific time and price.
  4. Trading

    Futures Fundamentals

    This tutorial explains what futures contracts are, how they work and why investors use them.
  5. 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.
RELATED FAQS
  1. How are futures used to hedge a position?

    Futures contracts are one of the most common derivatives used to hedge risk. Learn how futures contracts can be used to limit ... Read Answer >>
  2. Forward Contracts vs. Futures Contracts

    While both forward and futures contracts allow people to buy or sell a specific asset at a specific time at a given price, ... Read Answer >>
Hot Definitions
  1. Inflation

    Inflation is the rate at which prices for goods and services is rising and the worth of currency is dropping.
  2. Discount Rate

    Discount rate is the interest rate charged to commercial banks and other depository institutions for loans received from ...
  3. Economies of Scale

    Economies of scale refer to reduced costs per unit that arise from increased total output of a product. For example, a larger ...
  4. Quick Ratio

    The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets.
  5. Leverage

    Leverage results from using borrowed capital as a source of funding when investing to expand the firm's asset base and generate ...
  6. Financial Risk

    Financial risk is the possibility that shareholders will lose money when investing in a company if its cash flow fails to ...
Trading Center