What are exotic options?

What are exotic options? 
Exotic options are hybrid financial securities that offer unique and customizable payment structures, expiration dates, and strike prices. Light exotics are structures that include one or more vanilla options strategies and one exotic quality. Heavy exotics are structures that include more than one exotic quality.
What’s the difference between vanilla vs. exotic options?
 
Vanilla Option
Exotic Option
Definition
Basic financial derivative. Call option or put option with no special or unusual features.
Financial derivative often involving multiple vanilla options and additional features/customizations.
Example
Call option
Put option 
Covered call 
Put selling
Basket option 
Barrier option 
Fixed coupon note
Lookback option 
Binary option 
... and many more
Advantage
Basic trading strategy
Advanced trading strategy
Earn superior yields
Add downside protection for your trades
Express views of the market flexibly
Customize trading positions to meet specific risk/return needs
Risks
Initial investment may lose value because of the outcome of trade
Face unlimited losses without protection for options sellers
Initial investment may lose value because of the outcome of trade
 
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	Vanilla Option	Exotic Option
Definition	Basic financial derivative. Call option or put option with no special or unusual features.	Financial derivative often involving multiple vanilla options and additional features/customizations.
Example	Call option Put option Covered call Put selling	Basket option Barrier option Fixed coupon note Lookback option Binary option ... and many more
Advantage	Basic trading strategy	Advanced trading strategy Earn superior yields Add downside protection for your trades Express views of the market flexibly Customize trading positions to meet specific risk/return needs
Risks	Initial investment may lose value because of the outcome of trade Face unlimited losses without protection for options sellers	Initial investment may lose value because of the outcome of trade

Last modified 6mo ago