Wild Card Option
The wild card option is an embedded delivery option in U.S. Treasury bond and note futures contracts that grants the short (futures seller) the right to announce delivery intent at 2:00 PM Chicago time—when futures trading closes—but postpone the actual delivery (and, crucially, the invoice price determination) until 8:00 PM, giving the short a window to monitor cash Treasury prices and deliver at the most advantageous time.
Key takeaways
- The wild card option arises from the timing mismatch between the futures market close (2:00 PM Chicago) and the cash Treasury market close (5:00 PM or later).
- The short can invoke the wild card option on any day during the delivery month, not just the final day.
- If cash prices fall after 2:00 PM, the short can deliver the cheapest-to-deliver bond at the already-fixed futures invoice price, profiting from the divergence.
- The wild card option has measurable value that reduces the futures price relative to a theoretical no-option value.
- It is one of several delivery options embedded in Treasury futures, alongside the end-of-month option and the quality option.
Explanation
The wild card option is a nuanced but economically significant feature of the U.S. Treasury futures complex. Understanding it requires familiarity with the delivery process for Treasury bond and note futures contracts traded on the CME Group (formerly CBOT). During the delivery month, the party holding a short futures position must at some point deliver actual Treasury securities to the long and receive the invoice price in return. The invoice price is locked in at 2:00 PM on the day the short files its 'notice of intention to deliver,' based on the futures settlement price established at that time.
However, cash Treasury markets—where the actual bonds trade—remain active after 2:00 PM and can move in either direction. If Treasury prices decline after 2:00 PM, the short can purchase bonds at the lower cash market price and deliver them at the already-fixed (higher) invoice price. The 'wild card' nature of this option refers to the fact that the short does not need to decide in advance whether to invoke it; the right to file delivery intention each afternoon through 8:00 PM persists throughout the entire delivery month, creating a sequence of rolling options.
Formally, the wild card option is a series of at-the-money put options on Treasury bond prices (from the short's perspective), each with approximately six hours of life (2:00 PM to 8:00 PM). Because these options expire daily but renew each afternoon, their aggregate value depends on the volatility of Treasury prices in the late afternoon window, the carry cost of maintaining the position, and the number of delivery days remaining in the month. Early work by Gay and Manaster (1984) and later by Hemler (1990) quantified the wild card option value, finding it could reduce Treasury futures prices by several basis points relative to their theoretical clean price.
The wild card option, combined with the end-of-month option (which gives the short the right to deliver during the final seven business days of the month when futures have already stopped trading) and the quality option (the short's right to choose which eligible Treasury bond to deliver), creates a complex bundle of embedded delivery options. Sophisticated fixed income arbitrageurs model these options explicitly when evaluating the richness or cheapness of Treasury futures relative to the cash market, particularly around auction cycles and quarter-end repo market dynamics.
Example
It is mid-October, within the Treasury bond futures delivery month. The short has not yet issued a delivery notice and is monitoring the 2:00 PM futures settlement. At 2:00 PM, the December T-bond futures settle at 115-16 (115 and 16/32nds). The invoice price for the cheapest-to-deliver (CTD) bond is thus fixed at approximately $115,500 per $100,000 face value (adjusted for conversion factor). Between 2:00 PM and 5:00 PM, Federal Reserve commentary leads cash Treasury prices to fall 20 ticks (20/32nds ≈ $625 per $100,000 face). The short files delivery intention before 8:00 PM, purchases the CTD bond in the cash market at $114,875, and delivers it at the invoice price of $115,500—capturing a $625 profit per contract solely from exercising the wild card option. On a 100-contract position, this represents $62,500 of incremental profit with essentially no market risk.
Related terms
At The Money Basis Bond Cheapest To Deliver Clean Price Compound Option Delivery Delivery Notice European Option Face Value Market Risk Option