SOFR Options

Understanding the underlying

SOFR is a measure of the cost of borrowing cash overnight against Treasury collateral. Three-Month SOFR futures ultimately settle using compounded SOFR over a specified quarter. The quotation is 100 minus the annualized rate, rather than the rate itself.

A futures price of 96.00 implies 4.00% under this convention. A rise to 96.30 implies 3.70%. These figures refer to the contract’s reference period, not necessarily the next Federal Reserve policy decision.

Call and put example terms

SOFR futures use 100 minus the implied rate. A call on the futures price benefits from lower implied rates; a put benefits from higher implied rates, all else equal. One price point is USD 2,500.

Prices and premiums are hypothetical. The result measures expiry value and assumes any delivered position is closed at that price without additional movement or costs. It does not assume that every option settles in cash.

Buying sofr calls

A call gives its buyer upside exposure to the specified underlying. For this example, use a strike of 96 price units and a premium of 0.1 price units. With the stated multiplier of 2,500, the premium cost is USD 250.

At expiration with the underlying at 96.3, intrinsic value is (96.3 − 96) × 2,500 = USD 750. After the premium, the gain is USD 500 before other costs.

At or below the strike, the call has no intrinsic value and loses its whole premium. Breakeven at expiration is 96.1 price units. At 96.05, the call is in the money but still loses USD 125 after the premium.

Buying sofr puts

A put gives its buyer downside exposure. Assume the same 96 strike and 0.1-unit premium, costing USD 250 with the same multiplier. The equal call and put premiums are hypothetical, not a claim about actual market quotes.

At expiration with the underlying at 95.7, intrinsic value is (96 − 95.7) × 2,500 = USD 750. Subtracting the premium leaves USD 500 before costs.

At or above the strike, the put loses its full premium. Its breakeven is 95.9 price units. At 95.95, it is in the money but still loses USD 125 after the premium. Before expiration, time and implied volatility also affect the price; these expiry calculations do not predict its resale value.

The premium and the next position

A correct price view does not guarantee a profit. The move must be large enough and arrive before expiry to recover the premium. Before expiry, time remaining and implied volatility affect the price available when selling to close.

The premium limits the standalone purchased option’s loss. Exercise can create another position requiring funding or margin, and keeping that position introduces further risk. An uncovered seller can lose much more than the premium received.

Calls and puts on SOFR futures

A call benefits from the underlying futures price rising; a put benefits from it falling. Because of the inverted quotation, lower implied rates favor calls and higher implied rates favor puts, holding other factors constant.

One option exercises into one specified futures contract. A full price point is worth $2,500 per contract, so a 0.01-point move is $25. That is a price-value conversion, not a statement that every option has a 0.01 minimum tick.

Option expiry and the futures month

Different option expiries can reference different parts of the SOFR futures curve. A short-dated option need not be an option on the nearest futures contract. Check both dates when choosing exposure to a policy event.

Exercise can leave a futures position active after the option expires. That position is subject to margin and further gains or losses. Broker exercise deadlines and position-closeout policies should be understood before expiration.

What can go wrong?

The market may already price the rate cut or increase you expect. A smaller surprise than expected, time decay or falling implied volatility can make a long option lose money. A borrower also faces a mismatch if the debt resets on a different rate or schedule from the futures contract.

Selling options involves assignment and margin risk. Premium received is compensation for an obligation, not a fixed return.

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