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What is a Variable Maturity Option?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 11 September 2016
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    2003-2016
    Conjecture Corporation
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Variable maturity options are options that involve a put or a call that mature before the expiration date. Generally, the put or call will mature well before the date of expiration when the underlying instrument undergoes a substantial change in price. This change in price can be a significant increase or decrease, resulting in the variable maturity option realizing a greater or smaller return for the investor.

One of the features of the variable maturity option is that this strategy does present an opportunity to make a larger return on the investment. Unlike a standard option, the variable maturity option is influenced by market performance. When the underlying instrument associated with the option performs more favorably than anticipated, the returns will increase accordingly.

With the opportunity to realize greater profits, the variable maturity option also carries a greater degree of risk. Because there is the chance that the underlying asset for the option may drop in value, it is possible to earn much less on the option than anticipated. However, careful investigation can help to minimize the chances of investing in options that do not show promise.

Another aspect of a variable maturity option that is often attractive is the amount of the premium on the option. Premiums associated with a variable maturity option are often less than the premiums on a standard option. This will mean fewer resources dedicated to the option, making it easier for the investor to diversify the holdings that make up the portfolio.

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As with any investment, it is a good idea to discuss engaging in a variable maturity option with an investment professional before making a decision. Depending on the stability and diversity of the investor’s portfolio, the addition of options of this type may be both practical and rewarding. A qualified broker can assist the investor in determining if a variable maturity option fits in with his or her overall financial goals.

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