What is a compound option?

A compound option is an option where the underlying asset is another option. Four types: call-on-call, call-on-put, put-on-call, put-on-put. Used in staged financing, pharmaceutical R&D options, and mortgage prepayment modeling.

How is a call-on-call priced (Geske formula)?

CoC = S x M(a1, b1, sqrt(T1/T2)) - K2 x exp(-r x T2) x M(a2, b2, sqrt(T1/T2)) - K1 x exp(-r x T1) x N(a2), where M() is bivariate normal CDF and a1, a2, b1, b2 are d1, d2-type factors.

Compound Option Premium Calculator

Calculate the premium for compound options - options on options. Common in corporate finance for pricing the option to undertake a project (call-on-call for staged investments).

Principal ($)

Annual Rate (%)

Years

Compounding / Year

$ Finance Disclaimer: These calculators are for educational and illustrative purposes only. Results do not constitute financial advice. Consult a licensed financial advisor before making investment or borrowing decisions.

How to Use

Enter the values for the scenario you are assessing. Calculate the premium for compound options - options on options. Common in corporate finance for pricing the option to undertake a project (call-on-call for staged investments). Use the compound option premium result to inform your calculation.

Related Calculators

Black-Scholes Call

Finance Long-tail

Chooser Option