In Finance, what is a Wild Card Option?

Wild card options are an investment strategy that is usually associated with a treasury bond or with futures contracts that involve treasury notes. Essentially, the wild card option involves the use of a short position in order to delay the delivery of the underlying security until a specified time. There are several advantages to the use of this approach under certain conditions, with the results being profitable for both the buyer and the seller.

The buyer can benefit from the use of the wild card option. One of the benefits of the strategy is that the process allows the holder of the short futures contract to deliver the underlying security at a specified time of day. This time of day can even be after regular trading hours. All that is required is that the seller make the announcement earlier in the notice day. This allows both the buyer and seller to transact business at different pricing than the normally fixed trading prices that are part of the standard trading hours. A buyer can pick up some great bargains by participating in a wild card option, and possibly realize a quick return on the investment over the next day or two.

A seller can also benefit from the employment of the wild card option. Because the trade price is not fixed at the current trading day rate, it is possible to sell the bond or note at a different price. This may allow the seller to generate some extra revenue from the transaction before market conditions change over the next couple of days. Generally, sellers prefer to deliver the securities that are the lowest in price for that particular trading day, rather than more pricey securities that are likely to perform equally well the following day.

Wild card options are by their nature an example of a higher risk investment. For this reason, buyers should make sure that research regarding the security is conducted before entering into a commitment, and that the research demonstrates an acceptable opportunity for benefiting from the purchase. Competent brokers can often help interested clients identify wild card option opportunities that are worth consideration.