Chameleon Option

What Is a Chameleon Option?

A chameleon option can change its structure should foreordained terms of the contract be met, for example, a predefined increase or decline in the price of the underlying asset.

A chameleon option gives an investor greater flexibility in that they can trade a chameleon option as opposed to trading different vanilla options to achieve a similar outcome.

Figuring out the Chameleon Option

Chameleon options are traded over the counter (OTC) and are in this way adaptable in light of what the buyer and seller settle on. In easiest terms, a chameleon option could be both a call or put option, contingent upon which side of the strike price the underlying asset is on. In the event that the underlying asset is priced over the strike price it very well may be a call option, and in the event that the underlying asset's price is below the strike price, it very well may be a put option. In the event that a trader expected a large move in a stock, yet was uncertain of the course, rather than buying both a call and put they could purchase a chameleon option structured this way.

The advantage of the chameleon option is its flexibility. The gatherings can consent to their own strike price, expiration date, contract size, whether it's a call or put, and at which stretches any of these factors change.

The disadvantages of a chameleon option incorporate a higher premium than a vanilla option, fundamentally in light of the fact that the chameleon offers a greater chance of the option completing in the money (contingent upon the terms). The seller of the option, in this way, requests a higher cost for the option. All things considered, the cost of the chameleon might be more appealing than buying numerous vanilla options.

OTC options aren't liquid, so it may not be imaginable to escape the option prior to expiry if necessary. These options are essentially traded by sophisticated and high-net-worth people and institutions. They are rarely utilized by the average investor.

Illustration of a Chameleon Option

Chameleon options are highly adjustable, so coming up next is just one potential way it very well may be structured.

Expect a trader needs to buy a at the money call option that terminates in one month. The underlying stock is trading at $45, so the strike price on the chameleon option is additionally $45.

Due to a major news event turning out in the stock the buyer of the option likewise needs some downside protection. In the event that the stock falls below $40 they need the call transformed into a put option.

The chameleon option has given the trader basically two options in one. They have a call option if the price of the underlying ascents, and they have a put option if the underlying falls below $40.

Expecting a $45 strike vanilla option that lapses in a single month is trading for $1, and the $40 put is trading at $0.08, then, at that point, the price of the chameleon will probably be around $1.08, and perhaps somewhat less since the two players save money on transaction fees and the seller might wish to prompt the buyer to trade the chameleon rather than essentially buying a call and put assuming it is less expensive to do as such.

Highlights

• A chameleon option can change its structure should foreordained terms of the contract be met, like a predetermined increase or reduction in the price of the underlying asset.
• The advantage of the chameleon option is its flexibility based on conditions, in spite of the fact that it typically requests a higher premium in view of this highly adjustable nature.
• Chameleon options are traded over the counter (OTC) and are consequently adjustable in light of what the buyer and seller settle on.