Balloon Option

Balloon Option

An option whose notional payments increase significantly after a set threshold is broken.

Notes:

Commonly used in foreign exchange markets, these options provide greater leverage to the holder. The main idea behind the balloon option is that after the threshold is exceeded, the regular payout is increased. For example, let's say that the threshold is $100. After the underlying exceeds this amount, rather than paying the regular dollar-for-dollar amount, the option payment would balloon to $2 for every $1 change against the strike price.

See also: American Option, Bermuda Option, European Option, Mid-Atlantic Option, Notional Value, Option, Strike Price, Writer