Put On a Call

Posted in Finance, Accounting and Economics Terms, Total Reads: 394
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Definition: Put On a Call

This is also known as a split-fee option and it refers to a type of compound option. Compound options are the type of options in which the underlying itself is another option. There are two strike prices and two strike dates for a compound option. Mainly compound options are used in currency or fixed income markets. The advantages of compound option over a normal option is that compound option is cheaper and allows far more leverage. However, the premium for compound option is higher than a normal option.


Coming on to a Put on a Call option, the buyer of this option has a right but not an obligation to sell the underlying call option on the expiry date. This option is useful when the investor is bearish on the underlying asset and leverage is desired. Value of the put on a call option is inversely proportional to the price of the underlying asset. It decreases as the asset price increases, and increases as the asset price decreases.


Put on a call option are usually European style exercise that is they can be exercised only on the expiry date not before that like an American option. The 2 expiration dates are for the initial put option and second one is for the underlying call option.

 

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