An option on an option. The buyer generally executes the split fee with first an initial fee, with a window period at the end of which (upon payment of a second fee) the original terms of the option may be extended to a later predetermined final notification date.
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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.
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See compound option.
Wall Street Words: An A to Z Guide to Investment Terms for Today's Investor by David L. Scott. Copyright © 2003 by Houghton Mifflin Company. Published by Houghton Mifflin Company. All rights reserved. All rights reserved.