An option which has an overnight index swap as underlying. An overnight index swap (OIS) option tracks the overnight effective federal funds rate (which is a benchmark of the U.S short-term interest rate market). This type of option provides an effective tool for hedging longer term OIS exposure. It also allows investors and traders to take views on the Federal Open Market Committee (FMOC) policies.
In the U.S, this option matures in three months, and start dates for an OIS option coincide with IMM expiration dates, and as such it provides an instrumental tool to trade the spread between 3-month LIBOR and 3-month overnight rates.
