An exotic option which is automatically exercised if the underlying market price reaches or falls below a given in-the-money level over the option’s life, i.e., between the initiation date and maturity date. Once exercised, the option provides a certain payout. If that happened, the option is said to be “exploding” or “expiring”, and thence comes its name “the exploding option”. For example, if the underlying stock is currently trading at $70. A 73 Call “exploding” at $75 pays $2 when $75 is touched. This call option presents an alternative to a call spread since the holder will not have to incur transaction costs.
This option is also called an automatic cash-out option or a one-touch option.
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