Compound Option
An option for which the underlying is another option. Therefore, there are two strike prices and two exercise dates. These are the four types of compound options:
- Call on a call
- Put on a put
- Call on a put
- Put on a call Investopedia Says:
This type of option usually exists for currency or fixed-income markets, where an uncertainty exists regarding the option's risk protection capabilities. The advantages of compound options are that they allow for large leverage and they are cheaper than straight options. However, if both options are exercised, the total premium will be more than the premium on a single option. Related Terms:
Back Fee
Call
Exotic Option
Front Fee
Leverage
Option
Put
Strike Price
Underlying |