What does Bond Option mean?
A derivative contract whose underlying asset is a Bond. A Bond option allows investors to buy or sell a particular bond with a given expiration date at a predetermined price. It gives the holder of the option the right but not the obligation to execute a particular transaction with the writer of the option as per the terms of the agreement.
Futures Knowledge Explains Bond Option
A bond option can be either a call option or a put option with different rights for writer and holder of the options. Bond Options are also classified into two categories: American Option and European option based on the exercise rights attached with them. While a European Option can be exercised only at maturity, American Option can be exercised at any time during its life. Bond Options are traded on futures exchange and can also be settled for cash before expiry.