What Are Exotic Options?

In todays video we will learn all about Exotic Options. These classes are all based on the book Trading and Pricing Financial Derivatives, available on Amazon at this link. https://amzn.to/2WIoAL0 Check out our website http://www.onfinance.org/ Follow Patrick on twitter here: https://twitter.com/PatrickEBoyle What Are Exotic Options? In finance, an exotic option is an option which has features making it more complex than commonly traded vanilla options. Like the more general exotic derivatives they may have several triggers relating to determination of payoff. An exotic option may also include non-standard underlying instrument, developed for a particular client or for a particular market. Exotic options are more complex than options that trade on an exchange, and are generally traded over the counter (OTC). Look-Back Options Look-back options give their owners the right to buy or sell the underlying security at the most attractive price that it actually trades in the cash market over a specified period of time. This time period is typically - but not always - the same time frame as the option's life. Binary Options Binary options (also known as digitals) have a fixed payoff if the option ends up being in the money at expiration, regardless of the extent to which it is in the money. Bermudan Options Bermudan options are a hybrid between American and European options. Unlike American options (which can be exercised at any time during a specified period) and European options (which can be exercised only at maturity), Bermuda options may be exercised prior to maturity, but only on certain dates. Barrier Options Barrier options are options that are either activated or deactivated when the price of the underlying security passes through some predefined value (the barrier). Barrier options have eight different varieties: Up and in call - a call option that's activated if the price of the underlying rises above a certain price level. Up and out call - a call option that's deactivated if the price of the underlying rises above a certain price level. Down and in call - a call option that's activated if the price of the underlying falls below a certain price level. Down and out call - a call option that's deactivated if the price of the underlying falls below a certain price level. Up and in put - a put option that's activated if the price of the underlying rises above a certain price level. Up and out put - a put option that's deactivated if the price of the underlying rises above a certain price level. Down and in put - a put option that's activated if the price of the underlying falls below a certain price level. Down and out put - a put option that's deactivated if the price of the underlying falls below a certain price level. Restrike Options The strike price of these changes if the price of the underlying passes through a barrier price. They're typically written so that the strike price of calls is lowered and the strike price of puts is raised. Asian Options Asian options are very similar to look-backs, with the exception that while look-backs are based on the highest or lowest price over a period of time, Asians are based on an average price. These options can be divided into two categories: Asian strike options and Asian expiration options. Compound Options Compound options provide their owners with the right to buy or sell another option. These options create positions with greater leverage than traditional options. There are four basic types of compound options: Ca-call - the right to buy a call. Pu-call - the right to sell a call. Ca-put - the right to buy a put. Pu-put - the right to sell a put. Perpetual Zero Options As the name implies, perpetual zero options never expire, and they have a strike price equal to zero. The perpetual right to buy an underlying security at a price of zero has the same val Learn more about your ad choices. Visit megaphone.fm/adchoices