An option which allows the holder to trade the underlying market with limited downside in return for a given premium. According to the terms agreed on by both the option’s buyer and seller, the holder may take a long, short or flat position in the underlying up to a specific level (the notional amount). During the lifetime of the option, the holder is usually allowed to change his position a preset number of times. At maturity, the gains from underlying trades are calculated in order to determine whether the holder will receive a payout or not. If there proves to be positive gains, the option’s seller is required to pay the buyer the amount of gains. Otherwise, the holder is protected against any resulting losses. The maximum loss the holder may incur is the premium paid for the option.
This option is also known as a perfect trader option or passport option.
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