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Derivatives

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  • June 16, 2020
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Contingent Premium Option

An option contract for which no premium is paid upfront by the buyer (long). However, a pre-specified premium should be paid if the option is in the money at expiration date. For that reason, this option’s premium would be greater than that of a standard option to compensate the writer for time value and the risk of waiting before receiving the premium. This option is not entirely riskless since it can end up slightly in the money but with a payoff smaller than the premium that has to be paid.

It is also known as collect on delivery, cash on delivery, capitalized option, pay on exercise, contingent payment option and pay on exercise option.


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