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Derivatives

  Derivatives   |   Terms
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  • December 5, 2022
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Reduced Cost Option

In general, any type of option in which the premium is reduced due to the sale of another option. In other words, the premium paid in order to buy this option is partially compensated by the premium received from selling another option. This may result from accepting a less favorable strike price with respect to the strike of a long option, or in case the short option has a barrier feature and the like. For example, when an investor buys an option for USD 10 and writes another for USD 7, the long option is said to be a reduced cost option since its cost was lowered from USD 10 to USD 3. Likewise, if the strike price of a long option is set at USD 50, whilst that of a short option is set at USD 35, also the cost of the first option is said to be reduced.


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