Compound option or split-fee option 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

Expiration (options)

For an option contract, expiration is the date on which the contract expires. The option holder must elect to exercise the option or allow it to expire worthless.Typically, option contracts expire according to a pre-determined calendar. For instance, for U.S...

 and two strike price

Strike price

In options, the strike price is a key variable in a derivatives contract between two parties. Where the contract requires delivery of the underlying instrument, the trade will be at the strike price, regardless of the spot price of the underlying instrument at that time.Formally, the strike...

s. Usually, compounded options are used for currency or fixed income

Fixed income

Fixed income refers to any type of investment that is not equity, which obligates the borrower/issuer to make payments on a fixed schedule, even if the number of the payments may be variable....

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.

Variants

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

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

External links

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