Put on a Call

What Is a Put on a Call?

A put on a call (PoC) is a type of compound option by which a put option is written on a call option. Along these lines, there are two strike prices and two exercise dates.

Assuming that the option owner exercises the put option they will be short a call option, which is an option that gives the owner the right yet not the obligation to buy a specific asset at a set price inside a defined time span.

The value of a put on a call changes in inverse proportion to the stock price. This implies the value diminishes as the stock price endlessly increments as the stock price diminishes. A put on a call may likewise be known as a split-fee option.

How a Put on a Call Works

At the point when the holder exercises a put on a call, called the overlying option, they must then deliver the underlying call option to the seller and collect a premium in view of the strike price of the overlying put option. This premium is called the back fee.

On the other hand, when the holder exercises a compound call option, they must pay the seller of the underlying option a premium in view of the strike price of the overlying call option.

It is more considered normal to see compound options in currency or fixed-income markets, where vulnerability exists with respect to the option's risk protection abilities. The upsides of compound options are that they allow for large leverage and they are less expensive than straight options. Notwithstanding, on the off chance that the two options are exercised, the total premium will be more than the premium on a single option.

In the mortgage market, PoC options are valuable to offset the risk of interest rate changes between the time a mortgage commitment is made and the scheduled delivery date.

Real-World Application

While speculation in the financial markets will continuously be a major portion of compound option activity, business ventures could track down them helpful while planning or bidding on a large project. Now and again, they must secure financing or supplies before really starting or winning the project. In the event that they don't build or win the project they could be left with financing they needn't bother with. In this case, compound options give an insurance policy.

The equivalent is likewise true for institutions giving the financing as they try to hedge their exposure ought to in the event that they focus on giving the money required by businesses for their projects and those businesses don't win their deals.

Compound Options

A compound option is an option for which the underlying asset is another option. Accordingly, there are two strike prices and two exercise dates. They are accessible for any combination of calls and puts. For instance, a put where the underlying is a call option or a call where the underlying is a put option.

The following compound options are accessible:

• Call on a put: CoP (CaPut) — This is a call option on an underlying put option. The owner who exercises the call option gets a put option.
• Call on a call: CoC (CaCall) — The investor buys a call option with the right to buy an alternate call option on a similar underlying security.
• Put on a put: PoP — The investor must deliver the underlying put option to the seller and collect a premium in view of 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 in light of the strike price of the overlying put option.

At the point when the holder exercises a compound call option, called the overlying option, they must then pay the seller of the underlying option a premium in view of the strike price of the compound option. This premium is called the back fee. On the other hand, when the holder exercises a compound put option, they must deliver the underlying option to the seller of the compound option.

Traders might utilize compound options to broaden the life of a bearish options position since purchasing a put with a shorter chance to expiration for one more put with a more extended expiration is conceivable. As such, they can take part 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 considered normal to see compound options in currency or fixed-income markets, where vulnerability exists with respect to the option's risk protection abilities. The upsides of compound options are that they allow for large leverage and they are less expensive than straight options. Notwithstanding, in the event that the two options are exercised, the total premium will be more than the premium on a single option.

Features

• A put on a call option is a compound option that gives the holder the right to sell a call option
• In this manner, there would be two strike prices: one for the put and one for the underlying call.
• A put on a call option can be utilized by an investor to expand their hedge on an underlying asset for a minimal price, and it can likewise be utilized in real estate development to escape property rights without being committed to the deal.