DEFINITION of 'Bond Option'
An option contract in which the underlying asset is a bond. Other than the different characteristics of the underlying assets, there is no significant difference between stock and bond options. Just as with other options, a bond option allows investors the ability to hedge the risk of their bond portfolios or speculate on the direction of bond prices with limited risk.
BREAKING DOWN 'Bond Option'
A buyer of a bond call option is expecting a decline in interest rates and an increase in bond prices. The buyer of a put bond option is expecting an increase in interest rates and a decrease in bond prices.