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.

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RELATED FAQS
  1. When is a put option considered to be "in the money"?

    Learn about put options, what they are, how these financial derivatives operate and when put options are considered to be ... Read Answer >>
  2. How do I change my strike price once the trade has been placed already?

    Learn how the strike prices for call and put options work, and understand how different types of options can be exercised ... Read Answer >>
  3. When is a call option considered to be "in the money"?

    Learn about call options, their intrinsic values and why a call option is in the money when the underlying stock price is ... Read Answer >>
  4. What does it mean to be long or short a derivative?

    Find out more about derivative securities and what it indicates when traders or investors establish a long or short position ... Read Answer >>
  5. What is the difference between in the money and out of the money?

    Learn about how the difference between in the money and out of the money options is determined by the relationship between ... Read Answer >>
  6. How are call options priced?

    Learn how aspects of an underlying security such as stock price and potential for fluctuations in that price, affect the ... Read Answer >>
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