Altiplano Option: An Overview

An altiplano option is a particularly exotic type of derivatives investment that is based on multiple underlying securities rather than on a single underlying asset. It is one of a family of such options, called mountain range options, that was invented in the 1990s by the Swiss investment firm Société Générale.

As with any options investment, the buyer of an altiplano option gets the ability to buy or sell the underlying asset at a predetermined time and price. However, the investor receives a pre-set coupon payout if the strike price is not reached. In effect, the investor is getting insurance with some guaranteed payout in the event that this bet on the price direction of the assets is wrong.

Key Takeaways

  • The altiplano option offers the options investor a guaranteed payout if the investment fails to reach the expected strike price.
  • It is one type of so-called "mountain range options" that are created with a number of underlying stocks or other securities rather than just one.
  • Institutional investors and hedge funds are the primary market for altiplano options.

Understanding the Altiplano Option

Broadly speaking, the altiplano option is one type of basket option. That is, it is an option to buy or sell a number of stocks or other assets, not a single asset. As such, the pricing is determined not only by the implied volatility of each asset but also by the correlations between them.

If none of the securities in the Altiplano basket outperforms a specified benchmark rate of return during the life of the option, the investor will receive only the specified coupon rate for the option. But if any one of the underlying passes the benchmark, then the investment converts to a vanilla call option on each of the underlying securities or assets.

Mountain Range Options

Altiplano options belong to a group of so-called mountain range options created by French bank Societe Generale as an innovative way to cover several positions with a single derivative. The other types of options were dubbed Atlas, Himalayan, Annapurna, and Everest. The altiplano is a plateau in the Andes Mountains.

All of these structured options are designed to provide the advantage of lower aggregate volatility compared to that of individual securities. With lower volatility comes reduced hedging costs.

Stocks are typically the underlying securities for Altiplano options, and only certain stocks have appeared in the most prevalent Altiplano issues.

The market for mountain range options is mostly comprised of institutional investors such as investment banks and hedge funds. Their pricing formulas involve complex Monte Carlo simulations or other simulation techniques that require configuring a set of correlations between the strike price of each underlying security.

Because Altiplano options include a guaranteed payout if certain negative events occur, they are attractive securities for investors who seek capital protection.

Understanding Options in General

An option is a type of derivatives investment. That is, the investor is not buying or selling a specific asset but is buying an instrument that represents the value of that asset.

The option gives the investor the right to buy or sell that asset (or assets) at a specific price on a specific date. The investor who wants to buy the asset at that price purchases a call option. The investor who wants to sell the asset at that price purchases a put option.

If the investor turns out to be correct in guessing the price direction of that asset, the option is exercised and the investor reaps the profit. If the investor is wrong, the option is allowed to expire and the investor loses the premium paid for it.