What is the wild card option in Treasury bond futures, and how does the short use the late-afternoon price window?

The wild card option is one of the most interesting embedded options in Treasury bond futures. It arises from a timing mismatch: the futures settlement price is determined at 2:00 PM ET when CBOT futures close, but the short has until 8:00 PM ET to declare an intention to deliver using that 2:00 PM settlement price. Meanwhile, Treasury bonds continue trading in the cash market until 5:00 PM ET or later.\n\nThe Six-Hour Window:\n\nBetween 2:00 PM and 8:00 PM, the short holds a put-like option. If bond prices fall after 2:00 PM, the short can buy the CTD bond at the lower cash price and deliver it against the higher locked-in futures settlement.\n\n`mermaid\nsequenceDiagram\n participant Futures as CBOT Futures\n participant Cash as Cash Bond Market\n participant Short as Short Position\n Note over Futures: 2:00 PM - Settlement fixed\n Futures->>Short: Settlement price locked at 119.50\n Note over Cash: 2:00-5:00 PM - Bonds still trading\n Cash->>Short: CTD drops to $105.80\n Note over Short: 5:00-8:00 PM - Decision window\n Short->>Short: Compare invoice vs. market cost\n alt Profitable\n Short->>Futures: Issue delivery notice by 8 PM\n else Not profitable\n Short->>Short: Hold, repeat tomorrow\n end\n`\n\nWorked Example:\n\nAshworth Securities is short 200 T-bond futures. At 2:00 PM, the settlement price is 120-08 ($120.25). The CTD bond (CF = 0.9145, clean price at 2:00 PM = $109.98).\n\nAt 3:45 PM, a surprise Fed announcement pushes yields up 6 bps. The CTD bond drops to $109.42.\n\nLocked invoice (clean): 120.25 x 0.9145 = $109.97\nCurrent market cost: $109.42\nWild card profit: 109.97 - 109.42 = $0.55 per $100 face\nOn 200 contracts ($20M face): $0.55 x 200,000 = $110,000\n\nAshworth issues the delivery notice before 8:00 PM, locking in the gain.\n\nExercise Threshold:\n\nThe wild card option is exercised when the cash price decline exceeds transaction costs (bid-ask spread + settlement fees), typically around 3-5 basis points in yield terms for the CTD. The option resets each trading day during the delivery month, making it a sequence of daily European-style options.\n\nValuation:\n\nThe wild card option is valued at roughly 0-5 ticks per contract depending on volatility. Higher afternoon volatility (common on days with 2:00 PM economic releases) increases its value. Quantitative models treat it as a strip of daily options and use intraday volatility estimates to price it.\n\nDeepen your understanding of delivery options in our FRM course.