compound option

Compound option

Option on an option.

Compound Option

An option contract on an option contract. There are four basic types: a call on a call; a put on a call; a call on a put; and a put on a put. A compound option has two expiration dates and two strikes. There are also two premiums: one paid up front and the other paid if the underlying option is exercised. It is often used in markets where there are doubts on the risk for the underlying option, such as currency or fixed income markets. It is also called a split-fee option.

compound option

An option to purchase an option. Examples include, a call on a call option or a call on a put option. A fee must be paid to buy a compound option and a second payment must be made to the owner of the option in the event the compound option is exercised. Also called split-fee option. See also back fee, front fee.
References in periodicals archive ?
the value of the compound option over next interval is:
For our study, we examine two possible options: compound option and deferment option.
However, the payoff of a barrier option is much more dependent on the joint distribution of the underlying asset price at different points in time than is the payoff for a compound option.
Contingent on the evolution of prices, the project could be halted at each phase, so it can be considered a compound option.
Many players have bought a compound option under which they have to sell the dollar if it dips below 108.
Finally, we consider both investment opportunities as a compound option and calculate the value of the opportunity to complete the investment in First, (G([V.
If the stock is considered as an option on the value of the firm, V, then the value of the call as a compound option can be expressed as a function of the firm's value.
At the end of a year, the spread was even wider, and they exercised their third compound option to complete the project.
10) In the compound option formulation, the flexibility of multistage decision-making is explicitly taken into account, increasing the value of the option.
The compound option formula is derived using two approaches: the standard Black and Scholes approach and the martingale method.