How Does Balloon Option Applied in Options Market?

What Does Balloon Option Mean?
The Balloon Option is an option where there is a rise in notional payments after a pre decided threshold point passes/breaks.

How Does Balloon Option Applied in Options Market?
Such an option gives an advantage of higher leverage to the option holder and hence is widely used. The basic concept here is that after the threshold exceeds, there is increase in regular payouts. An example to explain this: Suppose the threshold is $50, once the underlying assets exceeds this limit, instead of paying regular dollar-per-dollar amounts, the ballooning payment happens say at $2 per single dollar against strike price.

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August 17, 2008 · Filed Under Options Trading

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