Compound option or split fee option is option on an option. the value of another option is involved in the exercise payoff of a compound option. Then a compound option has got two expiration dates and two strike prices.
Compounded options are often used by the traders for currency or fixed income markets where there is an existence of insecurity regarding the option’s risk protection. Another common business application for which the compound options are used is to hedge bids for business projects that may be accepted or that might be rejected.
The owners of compound options are provide with the right to buy or sell another option. Positions with greater leverage are created by these options as compared to traditional options.
Basic Types of Compound Options
Following are the four basic types of compound options:
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