Rainbow Option
A single option linked to two or more underlying assets. In order for the option to pay off, all the underlying assets must move in the intended direction. Investopedia Says:
The underlying securities can have different characteristics, such as expiry date and strike price, but all must move in the way the option holder has bet they will.
Here's a sports-betting analogy that demonstrates a rainbow option: suppose you're at a baseball tournament with three fields backing one another. One game is halfway through, a second is just starting and a third starts in an hour. A type of bet that's analogous to a rainbow option is one that earns you a profit if you pick all three winners, but gets you nothing if any one team you pick is a loser. Related Terms:
Basket Option
Exotic Option
Expiration Date
Option
Strike Price
Underlying
Vanilla Option |