DEFINITION of 'Chameleon Option'
An option that has the ability to change its structure should predetermined terms of the contract be met, such as a specified increase or decrease in the spot price. A chameleon option gives an investor greater flexibility in a single contract instead of requiring two or more contracts to achieve a similar result. They can be utilized for more complex ways to meet varying investment needs and varying expectations about the underlying's price movement.
BREAKING DOWN 'Chameleon Option'
An example of a chameleon option would be when a put option (a contract giving the owner the right, but not the obligation to sell a specified amount of an underlying security) automatically changes into an identical call option (similar to a put except rather than sell, it buys) after the price of the underlying exceeds a certain price.