Bermuda Option

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DEFINITION of 'Bermuda Option'

A type of exotic option that can be exercised only on predetermined dates, typically every month. Bermuda options are a combination of American and European options. American options are exercisable anytime between the purchase date and the date of expiration. European options, conversely, are exercisable only at the date of expiration. Bermuda options are exercisable at the date of expiration, and on certain specified dates that occur between the purchase date and the date of expiration. Other exotic options include binary options and quantity-adjusting options, often called quanto options for short.

INVESTOPEDIA EXPLAINS 'Bermuda Option'

Options are financial derivatives that offer buyers the right, but not the obligation, to buy (call) or sell (put) a security at a particular price on or before a specified date. Bermuda options provide writers with more control over when the options can be exercised, while giving the buyer a contract that is less expensive than an American option, and not as restrictive as a European option. Bermuda options are typically less expensive than American options, because of the larger premiums that American options demand due to their flexibility.

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RELATED FAQS
  1. When holding an option through expiration date, are you automatically paid any profits, ...

    Holding an option through the expiration date without selling does not automatically guarantee you profits, but it might ... Read Full Answer >>
  2. What do all of the letters in a stock option ticker symbol mean?

    The option ticker explains four main things about the option: the underlying stock, whether it is a call or a put option, ... Read Full Answer >>
  3. What's the difference between a regular option and an exotic option?

    Before learning about exotic options, you should have a fairly good understanding of regular options. Both types of options ... Read Full Answer >>
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