BOSTON OPTION Meaning and
Definition
-
The term "Boston Option" is a financial concept that refers to a type of option contract where the buyer has the option to choose the settlement method upon expiry. In this context, the settlement methods can include either physical delivery of the underlying asset or cash settlement.
In a traditional option contract, the settlement method is predetermined and standardized. However, a Boston Option allows the buyer the flexibility to decide how they want to settle the contract. This flexibility provides an advantage to the buyer, as they can choose the method that is most advantageous to them based on market conditions and their own preferences.
For instance, if the buyer expects the price of the underlying asset to rise significantly, they may choose to exercise the option and take physical delivery of the asset. On the other hand, if they believe that the price will not rise significantly, they may opt for cash settlement to avoid the costs and logistics associated with receiving the physical asset.
The name "Boston Option" originates from the fact that the concept was first introduced and popularized by the Boston Options Exchange (BOX), now known as Nasdaq BX Options. The innovation provided by the Boston Option allows for increased flexibility and customization within options trading, accommodating the diverse needs and strategies of market participants.
