Put On A Put

Definition of 'Put On A Put'


One of the four types of compound options, this is a put option on another underlying put option. The buyer of a put on a put has the right but not the obligation to sell the underlying put option - also known as the vanilla option - on the expiration date. This type of option is used when leverage is desired, and the trader is moderately bullish on the underlying asset. The value of a put on a put changes in direct proportion to the price of the underlying asset, i.e. it increases as the asset price increases, and decreases as the asset price decreases.

Also known as a split-fee option.

Investopedia explains 'Put On A Put'


A put on a put has two strike prices and two expiration dates, one for the initial compound put option and the other for the underlying vanilla put 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 put option will generally be lower than the cost of a put on the corresponding asset. It can therefore provide a great deal of leverage to the options trader.



comments powered by Disqus
Hot Definitions
  1. Cash and Carry Transaction

    A type of transaction in the futures market in which the cash or spot price of a commodity is below the futures contract price. Cash and carry transactions are considered arbitrage transactions.
  2. Amplitude

    The difference in price from the midpoint of a trough to the midpoint of a peak of a security. Amplitude is positive when calculating a bullish retracement (when calculating from trough to peak) and negative when calculating a bearish retracement (when calculating from peak to trough).
  3. Ascending Triangle

    A bullish chart pattern used in technical analysis that is easily recognizable by the distinct shape created by two trendlines. In an ascending triangle, one trendline is drawn horizontally at a level that has historically prevented the price from heading higher, while the second trendline connects a series of increasing troughs.
  4. National Best Bid and Offer - NBBO

    A term applying to the SEC requirement that brokers must guarantee customers the best available ask price when they buy securities and the best available bid price when they sell securities.
  5. Maintenance Margin

    The minimum amount of equity that must be maintained in a margin account. In the context of the NYSE and FINRA, after an investor has bought securities on margin, the minimum required level of margin is 25% of the total market value of the securities in the margin account.
  6. Leased Bank Guarantee

    A bank guarantee that is leased to a third party for a specific fee. The issuing bank will conduct due diligence on the creditworthiness of the customer looking to secure a bank guarantee, then lease a guarantee to that customer for a set amount of money and over a set period of time, typically less than two years.
Trading Center