What are the timing options the short has during the delivery month?

Question

AcadiFi · Accepted Answer

Treasury futures give the short three distinct timing options: the quality option (which bond), the timing option (which day within the delivery month), and the wild card option (initiate delivery between 2pm settle and 8pm notice deadline using that day's settlement price). The timing option lets the short delay delivery if positive carry is available, or accelerate if negative. The wild card allows arbitrage when Treasury prices move after futures settle: if cash bonds rally 1/32 after 2pm, the short can lock in settle-based invoice while buying cheaper bonds.

Merriweather Bond Arbitrage models these options as a sequence. End-of-month option lets the short deliver on the last seven business days after trading ceases, using the last trading day's settlement. Empirically these timing options are worth a few ticks cumulatively, though they diminish in low-volatility regimes. Longs price this into the futures quote: the quoted price sits below the static cost-of-carry price by the sum of embedded short options.

```mermaid
flowchart TD
  Start[Delivery Month Begins] --> Quality[Choose CTD Bond]
  Quality --> Timing[Pick Delivery Day]
  Timing --> Wild[Wild Card 2-8pm]
  Wild --> EndM[End of Month Option]
  EndM --> Settle[Invoice Settled]
```

What are the timing options the short has during the delivery month?

Master Level II with our CFA Course

Related Questions

Practice Questions