Wild Card Play

A wild card play, typically referring to treasury bond (T-Bond) derivatives, is where the short contract holder has the right to delay delivery on a futures contract past the last closing price, even though the contract is no longer trading. A wild card play occurs when a contract holder retains the right to deliver on the contract for a given period of time following the close of trading at the closing price. This will end up financially benefiting the contract holder if there is a shift in the value or price of the asset between the time of the closing price and the actual delivery.

Having the right to a wild card play allows the holder to deliver the cheapest to deliver (CTD) issue, regardless of the value of that issue at the time at which the contract expired. The specified time at which delivery can take place varies from contract to contract depending on the rights granted to the holder of the wild card play. This situation may also occur in other markets or those involving bond options contracts.

The Chicago Board of Trade (CBOT) Treasury Bond Futures Contract, which was first introduced in 1977, allows the short position several delivery options as to when and with which bond the contract will ultimately be settled. The wild card play, which refers to the flexible timing option, allows the short position to choose any business day in the delivery month to actually make delivery to the long contract holder. In addition, the contract settlement price is fixed in place at 2:00 p.m. on the day that the futures market closes on expiry, despite the facts that the short position need not declare an intent to settle the contract until 8:00 p.m. and that trading in Treasury bonds can occur all day in dealer markets. If bond prices change significantly between 2:00 and 8:00 p.m., the short has the option of settling the contract at a favorable 2:00 p.m. price. This phenomenon, which recurs on every trading day of the delivery month, creates an implied sequence of 6-hour put options for the short position which has been dubbed the "wild card play" or "wild card option".

The value of the implied put option relevant to the wild card play was first formalized by Alex Kane and Alan J. Marcus in a 1985 paper for the National Bureau of Economic Research (NBER), although earlier research suggested that in practice actual short bond futures participants do not act optimally in taking advantage of the wild card play.