DEFINITION of 'Put On A Call'
One of the four types of compound options, this is a "put" option on an underlying "call" option. The buyer of a put on a call has the right but not the obligation to sell the underlying call option on the expiration date. This type of option is used when leverage is desired, and the trader is bearish on the underlying asset. The value of a put on a call changes in inverse proportion to the price of the underlying asset, i.e. it decreases as the asset price increases, and increases as the asset price decreases. Also known as a split-fee option.
BREAKING DOWN 'Put On A Call'
A put on a call has two strike prices and two expiration dates, one for the initial put option and the other for the underlying call option. Note that compound options are generally European-style exercise, which means that they can only be exercised on the expiration date.
Since one of the variables that determines the cost of an option is the price of the underlying asset, the cost of a put on a call option will generally be much lower than the cost of a put on the corresponding asset. It can therefore provide a great deal of leverage to the options trader.