Balloon Option

AAA

DEFINITION of 'Balloon Option'

An option contract where the strike price increases significantly after the underlying asset's price reaches a predetermined threshold. A balloon option increases the investor's leverage on the underlying asset.

INVESTOPEDIA EXPLAINS 'Balloon Option'

The main idea behind the balloon option is that after the threshold is exceeded, the regular payout is increased. For example, let's say that the threshold is $100. After the underlying exceeds this amount, rather than paying the regular dollar-for-dollar amount, the option payment would balloon to $2 for every $1 change against the strike price.

RELATED TERMS
  1. Option

    A financial derivative that represents a contract sold by one ...
  2. Notional Value

    The total value of a leveraged position's assets. This term is ...
  3. Strike Price

    The price at which a specific derivative contract can be exercised. ...
  4. Balloon Loan

    A type of loan which does not fully amortize over its term. Since ...
  5. American Option

    An option that can be exercised anytime during its life. American ...
  6. European Option

    An option that can only be exercised at the end of its life, ...
Related Articles
  1. Options Basics Tutorial
    Options & Futures

    Options Basics Tutorial

  2. Vertical Bull and Bear Credit Spreads
    Options & Futures

    Vertical Bull and Bear Credit Spreads

  3. Forecasting Market Direction With Put/Call ...
    Options & Futures

    Forecasting Market Direction With Put/Call ...

  4. Options On Futures: A World Of Potential ...
    Options & Futures

    Options On Futures: A World Of Potential ...

Hot Definitions
  1. Wage-Price Spiral

    A macroeconomic theory to explain the cause-and-effect relationship between rising wages and rising prices, or inflation. ...
  2. Accelerated Depreciation

    Any method of depreciation used for accounting or income tax purposes that allows greater deductions in the earlier years ...
  3. Call Risk

    The risk, faced by a holder of a callable bond, that a bond issuer will take advantage of the callable bond feature and redeem ...
  4. Parity Price

    When the price of an asset is directly linked to another price. Examples of parity price are: 1. Convertibles - the price ...
  5. Earnings Multiplier

    An adjustment made to a company's P/E ratio that takes into account current interest rates. The earnings multiplier is used ...
  6. Macroeconomics

    The field of economics that studies the behavior of the aggregate economy. Macroeconomics examines economy-wide phenomena ...
Trading Center