Delivery Option
A delivery option is a feature added to some interest rate futures contracts. The accrued interest option gives the seller the right to deliver the bond on any business day of the delivery month, which means they can track short-term interest rates over the course of the month to yield the best deal. The delivery option permits the option seller to determine the timing, location, quantity, quality, and the wildcard features of the underlying commodity, which is set to be delivered. The quality option is a type of rainbow option which allows the seller to deliver any Treasury bond with at least 15 years to maturity or call date. American options allow option holders to exercise the option at any time before and including its maturity date.
What Is a Delivery Option?
A delivery option is a feature added to some interest rate futures contracts. The delivery option permits the option seller to determine the timing, location, quantity, quality, and the wildcard features of the underlying commodity, which is set to be delivered. Delivery option terms are stated in the delivery notice.
Understanding Delivery Option
Interest rate future options frequently contain delivery options. Delivery options make future contracts complicated, and traders need to understand all components of the deal entirely. All futures contracts are between a seller, known as the short, and the buyer, known as the long. The delivery option outlines a variety of methods for the seller to deliver the underlying security. The buyer may assume additional risk due to the seller's flexibility on delivery.
The Chicago Mercantile Exchange (CME) acts to assign a clearing firm to the futures contract traded on the Chicago Board of Trade (CBOT). Treasury bond future options are the most actively traded contract in the United States. The majority of exchange-traded options are American-style. An American option allows exercise anytime during its life. American options allow option holders to exercise the option at any time before and including its maturity date. In contrast, European options allow exercise only at maturity.
Elements of Delivery Options
At agreed upon points, during the futures contract, the seller may make decisions that will affect the delivery upon expiration. The CME provides information on the basics of Treasury futures Delivery options, basis spreads, and delivery tails:
Related terms:
Chicago Board of Trade (CBOT)
The Chicago Board of Trade (CBOT) is a commodity exchange established in 1848 where both agricultural and financial contracts are traded. read more
Cheapest to Deliver (CTD)
Cheapest to deliver (CTD) in a futures contract is the cheapest security that can be delivered to the long position to satisfy the contract specifications. read more
Chicago Mercantile Exchange (CME)
The Chicago Mercantile Exchange or CME is a futures exchange which trades in interest rates, currencies, indices, metals, and agricultural products. read more
Derivative
A derivative is a securitized contract whose value is dependent upon one or more underlying assets. Its price is determined by fluctuations in that asset. read more
Futures Contract
A futures contract is a standardized agreement to buy or sell the underlying commodity or other asset at a specific price at a future date. read more
Futures Exchange
A futures exchange is a central marketplace, physical or electronic, where futures contracts and options on futures contracts are traded. read more
Physical Delivery Defined
Physical delivery is a term in an options or futures contract which requires the actual underlying asset to be delivered on a specified delivery date. read more
Positive Carry
Positive carry is the practice of investing with borrowed money and profiting from the rate difference. The strategy is common in currency markets. read more
Seller's Option
A seller's option, often used in conjunction with a forward contract, gives the seller the right to choose some of the delivery specifications. read more
Wild Card Option
A wild card option allows treasury bond futures contracts or treasury note futures contracts to permit the short position to delay the delivery of the commodity. read more