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An exotic option. It represents a call option on a put option. That is, you purchase the option to buy a put option at a particular price on or before the expiration date.
Copyright © 2012, Campbell R. Harvey. All Rights Reserved.
A call option contract on a put option. A caput has two expiration dates and two strikes; there are also two premiums: one paid up front and another paid if the underlying option is exercised. A caput gives the holder the right, but not the obligation, to buy a put option, which he/she does if the price on the asset underlying the put option declines. Like other compound options, it is often used in markets where there are doubts about the risk for the underlying option, such as currency or fixed income markets. Significantly, caputs trade only over-the-counter, not on an exchange.
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