3-Month SOFR Options Contract Summary

SOFR Options Liquidity with respect to Expiration:

The first 2 quarterly option expirations (SFRM3 & SFRU3) and first 3 serial option expirations (SFRJ3, SFK3, SFRN3) are typically the most liquid STIR option derivative contract of any exchange. Liquidity as the curve extends drops the further out one ventures. Almost every market making firm will have a position in these 5 expirations. There are 3 liquidity cliffs. The first cliff occurs at the 3rd quarterly expiration (SFRZ3) and extends out to the 5th quarterly expiration (SFRM4). This includes the 4th serial expiration (currently SFRQ3). The second liquidity cliff occurs at the 6th quarterly expiration (SFRU4) and extends to the 8th expiration (SFRH5). The third cliff occurs at the 9th quarterly expiration (SFRM5) and extends out to the end of the curve. There are only a few market making firms that operate in this fourth tier of liquidity. 3-Month SOFR options offer highly liquid short dated option expirations that target longer dated exposures and are called 'mid-curve' options. For example, the product offers options in the following: 1-year contracts ('Short' or 0q) expiring this year based on 5th-8th quarterly futures (SFRM4-SFRH5), 2-year ('Green' or 2q) expiring this year based on 9th - 12th quarterly futures (SFRM5-SFRH6), 3-year ('Blue' or 3q) expiring this year based on 13th - 16th quarterly futures (SFRM6-SFRH7), or 4-year ('Gold' or 4q) expiring this year based off of 17th-20th quarterly futures (SFRM7-SFRH8) futures of that same month. Liquidity for 1yr and 2yr mid curves based off of first 2 quarterly expirations (0QM3-0QU3, 2QM3-2QU3) and first 3 serial expirations (0QJ3, 0QK3, 0QN3) & (2QJ3, 2QK3, 2QN3) mirror the highly liquid nature of their front month counterparts. Liquidity then drops for 3yr and 4yr mid-curve options expirations. This lower liquidity plateau includes all mid curve contracts for the last serial expiration (0QQ3, 2QQ3, 3QQ3, 4QQ3) and the next 2 quarterly expirations (0QZ3-0QH3, 2QZ3-2QH3, 3QZ3-3QH3, 4QZ3-4QH3). CME offers 2 rolling weekly expirations for mid-curve options (currently S04, S05). S04 expires in week 4 of each month and S04 expires in week 5 of each month. CME also 3-month (TS2), 6-month (TS3), and 9-month (TS4) 'term' mid-curve contracts. The term contracts are offered on the first 2 serial months (TS2J3/TS3J3/TS4J3, TS2K3/TS3K3/TS4K3) and the first quarterly expiration (TS2M3/TS3M3/TS4M3) and expire accordingly between 0-3 months depending on the contract (SFRJ3/SFRK3/SFRM3). 'Term 2' or TS2 is a 3-month mid-curve with the options underlying tying itself to the 2nd quarterly future (currently SFRU3). 'Term 3' or TS3 is a 6-month mid-curve with the options value basing itself off of the 3rd quarterly future (currently SFRZ3). 'Term 4' or TS4 is a 9-month mid-curve with the options value basing itself off of the 4th quarterly future (currently SFRH4). Weekly options as well as all of the 3-9 month term mid-curve options are historically very illiquid. Significant edge will need to be given to move large orders at a single limit price.

Quesitons? Feel free to reach out on LinkedIn, Bloomberg, or website contact form.