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Deferred Payment American Option
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This structure, far more common with puts than calls, permits an option holder to freeze the underlying price at which an option will be exercised prior to the option's maturity. Under the deferred payment feature, the intrinsic value of the 'exercised' option is not paid out until the scheduled maturity (expiration) of the option. The actual or implied carrying cost of the long underlying position which makes American puts more expensive than European puts remains with the put holder until expiration. This contract usually costs approximately the same as a European put but provides some of the market timing possibilities of an American put. Also called a Deferred Payout Option and may be embedded in a Deferred Payment Note or Bond (2) or a Fixed Assurance Note. See also Shout Option (2), American Option, Bermuda Option, European Option, Japanese Option, Modified American Option, Quasi-American Option.
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