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开奖号码历史查询:vanilla options to attain the same result.

Understanding the Chameleon Option

Chameleon options are traded 澳洲幸运5开奖号码历史查询: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开奖号码历史查询: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 di𒊎rection, instead of buying both a call and put they could purchase a chameleon ꩵoption 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开奖号码历史查询:expiration date, c🅘ontract size, whether it's a call or put, and at which intervals any of these v😼ariables 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开奖号码历史查询:in the money (depending on the terms). The sell𒅌er of the option𝄹, therefore, demands a higher cost for the option. That said, 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 are highly customizable, so the following is j🎉ust one possible way it could be structured.

Assume a trader wants to buy an 澳洲幸运5开奖号码历史查询:at the money call option that expires in one month. The underlying stock is trading at $45, so 𒅌the strike price on the chameleon option is also $45.

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

The chameleon option has given the trader essentially 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.