Balloon Option

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.

BREAKING DOWN '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.

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RELATED FAQS
  1. How does the term 'in the money' describe the moneyness of an option?

    Find out what in the money means about the moneyness of call or put options and what it indicates about the relationship ... Read Answer >>
  2. What is the difference between in the money and out of the money?

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  3. How do I set a strike price for an option?

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  4. How do I change my strike price once the trade has been placed already?

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  5. What's the difference between a regular option and an exotic option?

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  6. Can an option have a negative strike price?

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