Multi Index Option

A multi-index option is like setting up a race between two equity indices. Your return is based on the extent one of the indices outperforms the other other.

Think of it like a horse race. You're running Fast Rider against Pounding The Turf in a match race. Except...you don't bet on which horse will win. Instead, you bet on the distance between the horses at the end of the race. The greater the space between them at the finish, the bigger your payment.

You buy a multi-index option pairing the Global Cheese Index (or GCI) with the U.S. Post-Dairy Digestive Relief Medications Index (or PDDRM). The option you buy is based on a 2% spread.

You need one of the options to outperform the other by at least two percentage points in order to exercise it profitably. The GCI rises 5% before the option's expiration. Meanwhile, the PDDRM climbs 9%. The difference between the two indices was four percentage points...well above the 2% needed for your option. You cash in the option for a profit.

However, if the rise in the PDDRM had only been 6%, meaning the spread between the two indices only equaled one percentage point, your option would be worthless. You would have let it expire and eaten the cost of buying the option in the first place.