Compound option or split fee option^[1][2] is option on an option. The exercise payoff of a compound option involves the value of another option. A compound option then has two expiration dates and two strike prices. Usually, compounded options are used for currency or fixed income markets where insecurity exists regarding the option’s risk protection. Another common business application that compound options are used for—to hedge bids for business projects that may or may not be accepted.

[edit] Variants

Compound options provide their owners with the right to buy or sell another option. These options create positions with greater leverage than traditional options. There are four basic types of compound options:^[3]

• Call on Call (CoC)
• Call on Put (CoP) or caput option
• Put on Put (PoP)
• Put on Call (PoC)

[edit] References

[edit] External links

• Compound Options
• Evaluation of compound options using perturbation approximation
• COMPOUND OPTION Calculator

v • d • e Derivatives market Derivative (finance) Options Terms Credit spread · Debit spread · Exercise · Expiration · Open interest · Pin risk · Risk-free rate · Strike price · The Greeks · Volatility Vanilla options Bond option · Call · Employee stock option · Fixed income · FX · Option styles · Put · Warrants Exotic options Asian · Barrier · Binary · Cliquet · Compound option · Forward start option · Interest rate option · Lookback · Mountain range · Rainbow option · Swaption Options strategies Butterfly · Collar · Covered call · Iron butterfly · Iron condor · Naked put · Straddle · Strangle Options spreads Backspread · Bear spread · Bull spread · Calendar spread · Ratio spread · Vertical spread Valuation of options Binomial · Black · Black–Scholes · Finite difference · Moneyness · Option time value · Put–call parity · Simulation Swaps Basis swap · Constant maturity swap · Credit default swap · Currency swap · Equity swap · Forex swap · Inflation swap · Interest rate swap · Total return swap · Variance swap · Volatility swap · Correlation swap · Conditional variance swap Forwards and Futures Backwardation • Commodity futures  • Contango • Currency future • Financial future • Forward market • Forward price • Forward rate • Interest rate future • Margin • Pricing of Forwards  • Pricing of Futures  • Single-stock futures Other derivatives CFD · CLN · CPPI · Credit derivative · ELN · Equity derivative · Foreign exchange derivative · Fund derivative · Inflation derivatives · Interest rate derivative · PRDC · Real estate derivatives · Real options Market issues Tax policy · Consumer debt · Corporate debt · Government debt · Climate change · Resource depletion · Late 2000s recession