What Is a Put on a Call?

A put on a call (PoC) is a type of compound option whereby a 澳洲幸运5官方开奖结果体彩网:put option is written on a 澳洲幸运5官方开奖结果体彩网:call option. Therefore, there are t💦wo strike prices and two e꧟xercise dates.

If the option owner exercises the put optio🍨n they will be short a call option, which is an op𒁃tion that gives the owner the right but not the obligation to buy a specific asset at a set price within a defined period.

The value of a put on a call changes in inverse proportion to the stock price. This means the value decreases as the stock price increases and increases as the stock price decreases. A put on a call may alꦯso be known as a split-fee option.

How a Put on a Call Works

When the holder exercises a put on a 𝐆call, called the overlying option, they must then deliver the underlying call option to the seller and collect a premium based on the strike price of the overlying put option. This premium is called the back fe꧅e.

Alternatively, when the holder exercises a compound call option, they must 💜pay the seller of the und🌳erlying option a premium based on the strike price of the overlying call option.

It is more common to see compound options in currency or 澳洲幸运5官方开奖结果体彩网:fixed-income markets, where uncertainty exists regarding the option's risk protection capabilities. The advantages of compound options are that they allow for large leverage and are cheaper than straight options. However, if both options are exercised, the total premium will be more🅰 than the premium on a single option.

In the mortgage market, PoC options are useful to offset the risk of interest rate changes between the tim💙e a mortgage commitment is made an🧸d the scheduled delivery date.

Real-World Application

While speculation in the financial markets will always be a major portion of compound option activity, business enterprises might find them useful when planning or bidding on a large project. In some cases, they must secure financing oꦚr supplies before actually starting or winning the project. If they do not build or win the project they could be left with the financing they do not need. In this case, compound options provide an insurance policy.

The same is al🍸so true for institutions providing the financing as they seek to hedge their exposure should they commit to providing the money needed by businesses for their projects and those businesses do not win thei🍸r deals.

Compound Options

A compound option is an option for which the underlying asset is another option. Therefore, there are two strike prices and two exercise dates. They are available for any combination of calls and puts. For example, a put where the underly🌱ing is a call option or a call where the underlying is a put option.

The following compound options are available:

• 澳洲幸运5官方开奖结果体彩网:Call on a put: CoP (CaPut)—This is a call option on an underlying put option. The owner who exercises the call option receives a put option.
• 澳洲幸运5官方开奖结果体彩网:Call on a call: CoC (CaCall)—The investor buys a call option with the right to buy a different call option on the same underlying security.
• 澳洲幸运5官方开奖结果体彩网:Put on a put: PoP—The investor must deliver the underlying put option to the seller and collect a premium based on the strike price of the overlying put option.
• Put on a call: PoC—The investor must deliver the underlying call option to the seller and collect a premium based on the strike price of the overlying put option.

When the holder exercises a compound call option, called the overlying option, they must then pay the seller of the underlying option a premium based on the strike price of the compound option. This premium is called the back fee. Alterﷺnatively, when the holder exercises a compound put option, they mus꧃t deliver the underlying option to the seller of the compound option.

Traders may use compound options to extend the life of a bearish options position since it is possible to buy a put with a shorter time to expiration for another put with a longer expiration. In other words, they♏ can participate in the losses of 🌠the underlying without putting up the full amount to buy it at expiration. The caveat is that there are two premiums paid and a higher cost.

It is more common to see compound options in currency or fixed-income markets, where uncertainty exists regarding the option's risk protection capabilities. The advantages of compound options are that they allow for large leverage and are cheaper than straight options. However, if both options are exercised, the total premium will be more than the prem🌱ium on a single option.

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