Rainbow Option

AAA

DEFINITION of 'Rainbow Option'

A single option linked to two or more underlying assets. In order for the option to pay off, all the underlying assets must move in the intended direction.

INVESTOPEDIA EXPLAINS 'Rainbow Option'

The underlying securities can have different characteristics, such as expiry date and strike price, but all must move in the way the option holder has bet they will.

Here's a sports-betting analogy that demonstrates a rainbow option: suppose you're at a baseball tournament with three fields backing one another. One game is halfway through, a second is just starting and a third starts in an hour. A type of bet that's analogous to a rainbow option is one that earns you a profit if you pick all three winners, but gets you nothing if any one team you pick is a loser.

RELATED TERMS
  1. Basket Option

    A type of financial derivative where the underlying asset is ...
  2. Vanilla Option

    A financial instrument that gives the holder the right, but not ...
  3. Underlying

    1. In derivatives, the security that must be delivered when a ...
  4. Option

    A financial derivative that represents a contract sold by one ...
  5. Strike Price

    The price at which a specific derivative contract can be exercised. ...
  6. Everest Option

    A type of exotic equity option belonging to a class known as ...
Related Articles
  1. Options Basics Tutorial
    Options & Futures

    Options Basics Tutorial

  2. Pick the Right Brokerage Account for ...
    Options & Futures

    Pick the Right Brokerage Account for ...

  3. The Top Technical Indicators For Options ...
    Options & Futures

    The Top Technical Indicators For Options ...

  4. Penny Stocks, Options and Trading on ...
    Options & Futures

    Penny Stocks, Options and Trading on ...

Hot Definitions
  1. Return On Sales - ROS

    A ratio widely used to evaluate a company's operational efficiency. ROS is also known as a firm's "operating profit margin". ...
  2. Halloween Strategy

    An investment technique in which an investor sells stocks before May 1 and refrains from reinvesting in the stock market ...
  3. Halloween Massacre

    Canada's decision to tax all income trusts domiciled in Canada. In October 2006, Canada's minister of finance, Jim Flaherty, ...
  4. Zombies

    Companies that continue to operate even though they are insolvent or near bankruptcy. Zombies often become casualties to ...
  5. Witching Hour

    The last hour of stock trading between 3pm (when the bond market closes) and 4pm EST. Witching hour is typically controlled ...
  6. October Effect

    The theory that stocks tend to decline during the month of October. The October effect is considered mainly to be a psychological ...
Trading Center