Multi Index Option

AAA

DEFINITION of 'Multi Index Option'

A type of investment in which the payoff depends on the difference in performance between two indexes or other financial assets. The payoff from the option is governed by the change in the spread between the indexes or assets. These options are generally settled in cash.

INVESTOPEDIA EXPLAINS 'Multi Index Option'

The payoff of a multi index option does not depend on market direction, rather a change in spread. For example, consider a multi index option on the likelihood of the S&P 500 outperforming Canada's TSX Composite after a year's time by five percentage points. After a year, if the S&P 500 has declined 2% but the TSX has declined 9%, the option will still have a positive payoff because the S&P 500 has outperformed the TSX by seven percentage points. If the S&P 500 outperforms by less than five percentage points after a year, the option will expire worthless.

RELATED TERMS
  1. Spread

    1. The difference between the bid and the ask price of a security ...
  2. Bear Spread

    1. An option strategy seeking maximum profit when the price of ...
  3. Index Option

    A financial derivative that gives the holder the right, but not ...
  4. Slippage

    The difference between the expected price of a trade, and the ...
  5. Bull Spread

    An option strategy in which maximum profit is attained if the ...
  6. Catastrophe Equity Put (CatEPut)

    Catastrophe equity puts are used to ensure that insurance companies ...
Related Articles
  1. Mutual Funds & ETFs

    ETF Options Vs. Index Options

    Choosing either ETF options or index options can make the difference between big profits or a big bust.
  2. Options & Futures

    Introducing The VIX Options

    Discover a new financial instrument that provides great opportunities for both hedging and speculation.
  3. Options & Futures

    Using Options Instead Of Equity

    Learn how to multiply returns and diversify risk by buying options instead of stock.
  4. Options & Futures

    Trading Volatility? Don’t Trade Stocks, Trade Options

    During times of volatility, traders can benefit greatly from trading options rather than stocks. We explain why.
  5. Options & Futures

    Top Brokers Offering Tools For Covered Calls

    Here are the brokers that offer the best tools for investors and traders to write covered calls and covered puts.
  6. Economics

    Effects of OIS Discounting for Derivative Traders

    The use of OIS discounting has important implications for derivative valuations and could positively or negatively impact a trader's profit or loss.
  7. Options & Futures

    The Perks of Trading Coffee Options

    As more people begin to trade coffee, we explain how coffee options work, who uses them, what drives valuations, and the risks and rewards.
  8. Trading Strategies

    Top Day Trading Instruments

    Day trading is an intense and often appealing activity. Investopedia provides the list of top financial instruments for day trading.
  9. Options & Futures

    Get To Know These Crucial US Options Market Regulations

    How are options regulated in the U.S and which organizations are involved in options market regulations?
  10. Options & Futures

    Give Yourself More Options With Real Estate Options

    Real estate options have many benefits, including a smaller initial capital requirement.

You May Also Like

Hot Definitions
  1. Income Effect

    In the context of economic theory, the income effect is the change in an individual's or economy's income and how that change ...
  2. Price-To-Sales Ratio - PSR

    A valuation ratio that compares a company’s stock price to its revenues. The price-to-sales ratio is an indicator of the ...
  3. Hurdle Rate

    The minimum rate of return on a project or investment required by a manager or investor. In order to compensate for risk, ...
  4. Market Value

    The price an asset would fetch in the marketplace. Market value is also commonly used to refer to the market capitalization ...
  5. Preference Shares

    Company stock with dividends that are paid to shareholders before common stock dividends are paid out. In the event of a ...
  6. Accrued Interest

    1. A term used to describe an accrual accounting method when interest that is either payable or receivable has been recognized, ...
Trading Center