A serial option is a type of option on a futures contract that is structured with an underlying asset that will expire in a short period of time. The process calls for making sure that the expiration date on the option takes place before the underlying asset reaches maturity. Typically, the duration of this type of option is 30 days or less, and is considered an excellent way to maximize potential for earning returns on contracts focusing on precious metals and other types of commodities.
One of the easiest ways to understand how a serial option functions is to consider a futures contract that has to do with silver as the underlying security. When there is no contract available for the current month but it is possible to secure one for the following month, the investor can choose to go with the serial option, structuring the option to expire shortly before the underlying asset on the futures contract reaches maturity. This provides the investor with time to see how the underlying security performs in the marketplace between the start date and the expiration date identified in the option. If the underlying asset performs very well, then the investor exercises the option and completes the purchase of the security at the price named in the original option. Doing so means the investor realizes a quick return, since the market value of the asset at the time of the expiration is greater than the price offered in the serial option the month before.
Along with increasing the chances for making a profit, the serial option can also help the investor sidestep incurring a loss. Using the same basic scenario, if the market price of the underlying asset drops to below the bid price named in the option, the investor can simply choose to not exercise the option. The end result is that the investor is not left with an asset that must either be held in hopes that it will recover enough to at least break even, or go ahead and sell the asset before the market price drops any further.
As with most investment strategies, there is some risk with the serial option. Failing to accurately project the movement of the underlying asset at least up to the expiration date of the futures contract can lead to making poor decisions that cost time and at least some losses due to missed opportunities. This is offset by the experience of seeing the security increase in value, exercising the option, then enjoying the benefits of creating a long position on an asset that is continuing to increase in market value.
