Jun 19

Compound option (exotics) – 4 minute screencast

by David Harper, CFA, FRM, CIPM

FRM |

compound_option

A compound option has two strike prices (K1, K2). The first exercise triggers ownership of an option not the asset; the holder of a compound option only exercises (at T1) if value of the call option exceeds the first strike price (if c > K1). Upon first exercise, holder owns a regular option such that second exercise only if S > K2.  As a compound option has two strike prices, there are four variations: call on a call, call on a put, put on a call, put on a put. Screencast:

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