Yield-Based Option


DEFINITION of 'Yield-Based Option'

A type of debt-instrument-based option that derives its value from the difference between the exercise price and the value of the yield of the underlying debt instrument. Yield-based options are settled in cash. A yield-based call buyer expects interest rates to go up, while a yield-based put buyer expects interest rates to go down.

BREAKING DOWN 'Yield-Based Option'

If the interest rate of the underlying debt security rises above the strike price of a yield-based call option plus the premium paid, the call holder is 'in the money'. Should the opposite occur, and the interest rate falls below the strike price less the premium paid for a yield-based put option, the put holder is in the money.

  1. Debt

    An amount of money borrowed by one party from another. Many corporations/individuals ...
  2. Option

    A financial derivative that represents a contract sold by one ...
  3. Yield

    The income return on an investment. This refers to the interest ...
  4. Exercise Price

    The price at which the underlying security can be purchased (call ...
  5. In The Money

    1. For a call option, when the option's strike price is below ...
  6. Put

    An option contract giving the owner the right, but not the obligation, ...
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