Rainbow Option

A rainbow. A collection of colors. Not just a room painted all drab brown, or an ugly shade of pea green. A vibrant, eclectic collage of colors.

Now let’s take that concept to the options market.

A vanilla option can be considered the drab-brown or pea-green paint equivalents in the derivatives market. This category includes regular calls and puts, options to buy or sell a single underlying asset (like a stock or commodity).

Just as a rainbow contains many colors, a rainbow option contains many underlying assets. It's a complex option contract based on the performance of multiple assets (based on several stocks, or a basket of commodities).

Rainbow options come in multiple varieties. Some pay off only based on the best performer in the group. Others are based on the minimum performance of all the option's component "colors." The main point is that they apply to multiple underlying assets at once.