I understand the concept of the compound option. However, I can not really get why it would beneficial compared to a plain vanilla option. I watched videos and read books on it. I heard it offers more leverage. In the compound option, you own an option on an option. Now the payoff/ risk profile confuses me. Example: SPY is currently at 350. I buy a compound call on a call option with the first option expiration in 6 months and the second expiration in a year's time. Assume the first cost 2usd and the second 3usd. Now my question is: If I instead buy a 6 months plain vanilla option would it cost more or less than the 2Usd of the first compound option? Now the second question: Let's ignore the second expiration compound option above and the exercise process and all that. Imagine SPY goes from 350 to 375 and I bought plain vanilla call for 2usd also valid for 6 months. I know I would make a profit of 2300 USD after subtracting the premium cost. but would I make the same profit on the first expiration compound option assuming the same premium cost?
It seems like you are asking "Is buying these two things the same as buying this one other thing?", to which the answer is "look it up". The easiest way to know it is to check the prices for today. If you give us the exact options contracts you are looking at, we can give a better answer. If you are asking "why someone would do this?", then the answer is a lot more broad. Maybe there's some yearly dividend, or expected liquidity difference between the two expirations. Again, knowing the exact contracts you are will get a more precise answer.
Ok, but I don't have access to the actual price of compound options. I am new to most exotic options so that is why I am asking a lot of newbie questions here. Let me rephrase my question. In a compound, there is a call on a call with two expirations. I pay a little premium for the first expiration option. I would like to know would it be cheaper to buy a plain vanilla call option with the same expiration as the first compound?
Exotics are hella interesting. I believe more and more retail will trade these, once they become more available. chooser options were the most interesting exotics... you get to choose for the strike to be either PUT/CALL before expiration, I think. barriers are cool, and I think there’s “options on options” which is like buying a call on a call buying a call on a put buying a put on a put Buying a put on a call. and selling as well.
Again, without knowing the specific strikes, dividends, european/american, etc., it will be hard to answer. It's like asking which of the following two expressions is greater? 1. max(X, Y) 2. max(max(A, B), C). Without knowing any of the variables, who could say?