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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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