DEFINITION of 'Outperformance Option'

An exotic call option that's value is determined by the differing performance of two underling assets or securities. The holder gains on the amount one asset outperforms another, both of which are pre-determined. These options are typically European-style, settled in cash, and traded in the over-the-counter market.

Also referred to as "margrabe option".

BREAKING DOWN 'Outperformance Option'

For example an investor may purchase an outperformance option, where they gain if the S&P 500 outperforms the FTSE 100 over a six-month period. If at the end of the six months the S&P 500 outperforms the FTSE 100, the option holder will gain. However, if the S&P has underperformed the FTSE 100 over this time period, the option will expire worthless.

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