SteadyOptions is an options trading forum where you can find solutions from top options traders. TRY IT FREE!

We’ve all been there… researching options strategies and unable to find the answers we’re looking for. SteadyOptions has your solution.

Ranges of Exotic Options


The standard call and put are well known to all option traders, but many exotic and more advanced options can also be opened. Whether a specific broker allows trading in these, and whether a trader has the necessary trading level, are questions to be addressed. This article just defines many of the exotic options that are possible.

Asian Option has a payoff decided by the average price of the underlying during the option’s life. Also called the Average Value Option, it may be set up with a fixed strike (where averaging is applied rather than the underlying price) or fixed price (in which price replaces the strike).
 

Barrier Options have payoffs determined by whether the underlying reaches or passes a known level during a limited time. They are described as “path dependent” for this reason. They may be knock-out (expires when a known barrier is reached)  or knock-in (becomes live when the barrier is reached). They are further defined as four types: up-and-out, down-and-out, up-and-in, or down-and-in. These define (a) whether a call or put is set, and (b) whether the specified level is reached or not by the deadline.


Basket Option involves a payoff determined by valuation of a basket of securities rather than on a single underlying. It may be set up based on stocks, commodities, or currencies. Value of this option is the weighted sum, or the weighted average of the assets included.


Bermuda Options allows early exercise, but is restricted to only certain dates, at times only one day per month. It may also limit when traders can enter positions. It is a hybrid between American and European style options.


Binary Options involve a fixed payoff amount for ITM options, or zero payoff for OTM options. It is also called a digital option or all-or-nothing option. The payoffs are discontinuous, and may be Cash-or-Nothing (zero payoff if price ends up below a call’s strike or above the put’s strike) or Asset-or-Nothing (pays nothing if the underlying is below a call’s strike or above a put’s strike).


Boston Options are American style contracts with the premium delayed until expiration date.


Canary Option allows exercise style between European and Bermuda positions. The timing is normally set as a quarterly date, but only after a time limit has run, which often is one full year.


Capped-Style Option limits the maximum profit possible within the option contract. When the cap amount is reached, exercise takes place automatically.


Chooser Options may also be called As You Like It Options. Traders can decide whether it is a call or a put, but only after a period has passed.


Cliquet Options are also called strike resets or rachets. It involves a series of positions with special rules for setting up a strike price. It might also involve setting upper and lower limits and a range of strikes.


Composite Options are options on one currency, with strikes given in a different currency; also called a Cross Option.


Compound Options are options on options in four types. Call on call,  call on put, put on call, and put on put. There are two strikes and two exercise dates.


Cumulative Parisian Options involve payoff depending on the time the underlying value has remained either above or below the strike.


Double Option provides the buyer a combination of call and put and is available primarily in commodities markets.


Evergreen Option sets the right to exercise with a notice period. It may involve other terms like exotic options such as the Bermuda Option. This rule gives sellers time to prepare for settlement.


Exchange Options allow the holders to exchange one asset for another. It is used for specific types of assets like currencies.


Forward Start Options will begin at a specified date in the future. Examples include employee stock options.


Game Option is also called an Israeli Option, and gives the writer a chance to cancel, but with a requirement to pay the payoff value plus a fee.


Gap options are binary options with a distance between exercise price and strike. The strike identifies the payoff maximum, and the gap identifies whether payoff can be made.


Lookback Options have payoffs determined by maximum or minimum underlying price reached during the option’s life.


Quanto Options are types of Composite Options where currency exchange rates are fixed before the option is opened.


Rainbow Options are opened on several different assets. For example, a short trader may select several outstanding bonds to be underlying securities to a rainbow option.


Reoption is a contract that has exercised but allows the owner to repurchase.


Shout Option is a European style contract in which the owner can “shout” to the writer and will be paid the greater of the usual payoff or intrinsic value.


Standard Parisian Barrier Options set value based on maximum time the underlying has remained above or below a limit price.


Swing Option gives buyers the right to exercise one call and one put on known exercise dates, often used in trading of energy futures.


The typical exotic option involves rules for moneyness, underlying, and payoff that are far more complex than the more vanilla calls, puts and combinations. Imagine how difficult it might be to set valuation using Black-Scholes or another pricing model, when there are so many variables and timing issues involved in the exotics.


Some exotic options may be hedged, even more readily than simple calls or puts. This opens a range of possibilities involving exotic positions, but traders may also discover that the maximum profit or loss is smaller than they expect. This is the unfortunate result of hedging and risk reduction; profitability becomes more limited, not to mention the time allowed for any profits to materialize.


Most traders have heard of many of these exotic forms of option, but it should not be surprising for anyone to have not previously heard of all of them. In fact, this list could also be incomplete because many other forms of exotics are likely to exist.

Michael C. Thomsett is a widely published author with over 80 business and investing books, including the best-selling Getting Started in Options, coming out in its 10th edition later this year. He also wrote the recently released The Mathematics of Options. Thomsett is a frequent speaker at trade shows and blogs on his website at Thomsett Publishing as well as on Seeking Alpha, LinkedIn, Twitter and Facebook.

 

 

What Is SteadyOptions?

Full Trading Plan

Complete Portfolio Approach

Diversified Options Strategies

Exclusive Community Forum

Steady And Consistent Gains

High Quality Education

Risk Management, Portfolio Size

Performance based on real fills

Try It Free

Non-directional Options Strategies

10-15 trade Ideas Per Month

Targets 5-7% Monthly Net Return

Visit our Education Center

Recent Articles

Articles

  • The Wheel Trade

    The “wheel” trade is variously described as a beginner’s strategy, a combination to exploit features of both calls and puts, and as “perfect” solution to the well-known risks of shorting calls, even when covered. The wheel could be defined as any of these, but a larger question should be: Is the wheel an elegant method for making profits consistently, or just a gimmick?

    By Michael C. Thomsett,

    • 0 comments
    • 229 views
  • Chooser Options

    Most options traders see their world as a choice between calls or puts, alone or in various combinations. But there is more. With a chooser option, traders can open a position and decide later whether it will be a call or a put. This is also called an as you like it option.

    By Michael C. Thomsett,

    • 0 comments
    • 252 views
  • Leveraged Anchor 2020 Year In Review

    Steady Options has now been trading the Leveraged Anchor strategy for two years, and, somewhat to my surprise, 2020 went even better than 2019. On the year, Leveraged Anchor was up 31.7%, while the total return of the S&P 500 was 18.4%.

    By cwelsh,

    • 2 comments
    • 686 views
  • Ratchet Options

    The “ratchet option” is so-called because as a series, each successive position activates when the previous option has expired. The trader ratchets up (or down) to the next position. Each one is set up to be as close to the money as possible. It has many names, including cliquet, moving strike, ladder, lock-in, or reset option.

    By Michael C. Thomsett,

    • 0 comments
    • 278 views
  • Steady Momentum 2020 Year in Review

    Steady Momentum Put Write (SMPW) is one of the available subscription services at Steady Options. We launched the strategy in early 2019, so we now have two years of performance to evaluate on both an absolute basis and relative to the strategy’s benchmark, PUTW (WisdomTree CBOE S&P 500 PutWrite Strategy Fund). 

    By Jesse,

    • 0 comments
    • 259 views
  • SteadyOptions 2020 Year In Review

    2020 marks our 9th year as a public trading service. It was an excellent year for us. We closed 130 winners out of 194 trades. Our model portfolio produced 117.1% compounded gain on the whole account based on 10% allocation per trade. We had only three losing months in 2020. 

    By Kim,

    • 0 comments
    • 537 views
  • The Jump-Diffusion Pricing Formula

    One of the more complex areas of options analysis involves pricing formulas. The best known among these is the Black Scholes Model (BSM). This is a widely cited method for attempting to determine what the option’s premium should be, but it is deeply flawed.

    By Michael C. Thomsett,

    • 0 comments
    • 309 views
  • Ranges of Exotic Options

    The standard call and put are well known to all option traders, but many exotic and more advanced options can also be opened. Whether a specific broker allows trading in these, and whether a trader has the necessary trading level, are questions to be addressed. This article just defines many of the exotic options that are possible.

    By Michael C. Thomsett,

    • 0 comments
    • 406 views
  • What To Do Before Committing To Trading

    Trading cryptocurrency has become a very popular and significant part of life. While it’s not for everyone, it’s certainly for an awful lot of people. There’s money to be made and areas to be invested in, and people will do what they can to make either a quick buck or an amazing figure.

    By Kim,

    • 0 comments
    • 540 views
  • Accurate Expiration Counting

    Options traders are rightfully concerned with the number of days to expiration of an option. At the time the position is opened, whether long or short, the issue of time decay must be at the forefront of risk evaluation. But is this performed accurately?

    By Michael C. Thomsett,

    • 0 comments
    • 444 views

  Report Article

We want to hear from you!


There are no comments to display.



Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account. It's easy and free!


Register a new account

Sign in

Already have an account? Sign in here.


Sign In Now

Options Trading Blogs Expertido