Compound Option

An option on an option. It grants the holder the right to buy or sell an option at a set price on a predetermined date. If the first option is exercised the underlying option will then behave as a standard option. There are two strike prices and two expiry dates, one for the compound option and one for the underlying option. Two option premiums, or prices, may be paid; one for the compound option, the other for the underlying option if the compound option is exercised.

See also: Gearing