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.

BREAKING DOWN '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.

  1. Mountain Range Options

    A family of exotic options based on multiple underlying securities. ...
  2. Deep In The Money

    A deep in the money option has a strike price significantly below ...
  3. Call On A Put

    One of the four types of compound options, this is a call option ...
  4. Back Fee

    A payment made to the writer of a compound option in the case ...
  5. Put On A Put

    One of the four types of compound options, this is a put option ...
  6. Exchange-Traded Option

    An exchanged-traded option is a standardized contract to either ...
Related Articles
  1. Trading

    A Newbie's Guide to Reading an Options Chain

    Learning to understand the language of options chains will help you become a more effective options trader.
  2. Trading

    Getting Acquainted With Options Trading

    Learn more about stock options, including some basic terminology and the source of profits.
  3. Investing

    Why Options Trading Is Not for the Faint of Heart

    Trading options is not easy and should only be done under the guidance of a professional.
  4. Trading

    Stock Options: What's Price Got To Do With It?

    A thorough understanding of risk is essential in options trading. So is knowing the factors that affect option price.
  5. Trading

    Trading Options on Futures Contracts

    Futures contracts are available for all sorts of financial products, from equity indexes to precious metals. Trading options based on futures means buying call or put options based on the direction ...
  6. Trading

    Options Hazards That Can Bruise Your Portfolio

    Learn the top three risks and how they can affect you on either side of an options trade.
  7. Trading

    Google Stock Too Expensive for You? Try Options

    Learn how to invest in Google (now Alphabet, Inc.) and other high-value stocks with less capital by using options.
  8. Trading

    Three Ways to Profit Using Put Options

    A brief overview of how to profit from using put options in your portfolio.
  1. Do you have to be an expert investor to trade put options?

    Learn about investing in put options and the associated risks. Explore how options can provide risk, which is precisely defined ... Read Answer >>
  2. Regular Vs. Exotic Options: What's the Difference?

    Before learning about exotic options, you need a fairly good understanding of regular options. Read Answer >>
  3. How can derivatives be used to earn income?

    Learn how option selling strategies can be used to collect premium amounts as income, and understand how selling covered ... Read Answer >>
  4. Why do option volume quotes differ on different websites?

    Option quotes are different in price and in volume because identical options can trade on more than one market or exchange. ... Read Answer >>
Hot Definitions
  1. Perfect Competition

    Pure or perfect competition is a theoretical market structure in which a number of criteria such as perfect information and ...
  2. Compound Interest

    Compound Interest is interest calculated on the initial principal and also on the accumulated interest of previous periods ...
  3. Income Statement

    A financial statement that measures a company's financial performance over a specific accounting period. Financial performance ...
  4. Leverage Ratio

    A leverage ratio is any one of several financial measurements that look at how much capital comes in the form of debt, or ...
  5. Annuity

    An annuity is a financial product that pays out a fixed stream of payments to an individual, primarily used as an income ...
  6. Restricted Stock Unit - RSU

    A restricted stock unit is a compensation issued by an employer to an employee in the form of company stock.
Trading Center