What Is a Chameleon Option?

A chameleon option has the ability to change its structure should predetermined terms of the contract be met, such as a specified increase or decrease in the price of the underlying asset.

A chameleon option gives an investor greater flexibility in that they can trade a chameleon option instead of trading multiple 澳洲幸运5官方开奖结果体彩网:vanilla options to attain the same result.

Understanding the Chameleon Option

Chameleon options are traded 澳洲幸运5官方开奖结果体彩网:over the counter (OTC) and are thus customizable based on what the buyer and seller agree on. In simplest terms, a chameleon option could be both a call or put option, depending on which side of the 澳洲幸运5官方开奖结果体彩网:strike price the underlying asset is on. If the underlying asset is priced above the strike price it could be a call option, and if the underlying asset's price is below the strike price, then it could be a put option. If a trader expected a large move in a stock, but was unsure of the direction, instead of buying both a c🐷all and put they could purchase a chameleon option structured like this.

The advantage of the chameleon option is its flexibility. The parties can agree to their own strike price, 澳洲幸运5官方开奖结果体彩网:expiration date, contract size, whether it's a call𝔍 or put, and at which intervals any of these variables change.

The disadvantages of a chameleon option include a higher premium than a vanilla option, primarily because the chameleon offers a greater chance of the option finishing 澳洲幸运5官方开奖结果体彩网:in the money (depending on the terms). The seller of the option, therefore, demands a higher cost for the option. That sai♏d, the cost of the chameleon may be more attractive than buying multiple vanilla options.

OTC options aren't liquid, so it may not be possible to get out of the option prior to expiry if needed. These options are primarily traded by sophisticated and high-net-worth individuals and institutions. They are rarely used by the average investor.

Example of a Chameleon Option

Chameleon options a✱re highly customizable, so thꦉe following is just one possible way it could be structured.

Assume a trader wants to buy an 澳洲幸运5官方开奖结果体彩网:at the money caౠll option that expires in one month. The underlying stock is trading at $45, so the strike price on the chameleon option is also $45.

Due to a major news event coming outꦗ in the stock the buyer of the option also wants some dowꦕnside protection. If the stock falls below $40 they want the call turned into a put option.

The chameleon option has given the 🐻trader essen🍒tially two options in one. They have a call option if the price of the underlying rises, and they have a put option if the underlying falls below $40.

Assuming a $45 strike vanilla option that expires in one month is trading for $1, and the $40 put is trading at $0.08, then the price of the chameleon will likely be around $1.08, and possibly slightly less since both parties save on transaction fees and the seller may wish to induce the buyer to trade the chameleon instead of simply buying a call and put if it is cheaper to do so.