An OTC-traded financial instrument (option) that allows the holder to take views on the volatility of a market. In its simplest form, a Napoleon option has a single payoff coupon payable at expiration date. The payoff coupon consists of a fixed coupon and the minimum return of an underlying index over specific reset or fixing dates. If the option is capped, the holder will receive the lower of the cap level and the sum of the fixed coupon and the best index return. If the option is floored, the holder will receive the larger of the floor level and the sum of the fixed coupon and the worst index return. Adding a floor to a coupon or index performance will increase the option’s price, whilst adding a cap will have the opposite effect.

In more complicated Napoleon options, the single payoff coupon may be based on the performances of many indexes, each of which is the sum of a fixed coupon and the worst return of the index over a specific observation period. Likewise, the multiple performances can be capped or floored or both. Complicated Napoleon options have multiple payoff coupons, each of which is based on multiple performances. The performances and the coupons can be capped or floored or both.