Deferred Payment Option
What it is:
A deferred payment option is an option contract for which the payment is deferred until, and paid not sooner than, the contract’s expiration date.
How it works (Example):
A deferred payment option operates no differently from a standard vanilla option contract with the exception that payment, should the holder choose to exercise the option, will not be received until the expiration date. For instance, if a deferred payment option has an expiration date of 31 December and the holder chooses to exercise on 1 November, he will not receive the proceeds until 31 December.
Why it Matters:
Though deferred payment options have a longer term to expiration and allow for greater leverage, holders must be aware that they will only be paid upon the contract's expiration date regardless of when they exercise the option.
