Complex Within But Advantageous
It has been seen that exotic options have a complex structure embedded within it there are a lot of advantages when compared to regular options and they are mentioned below:
- The requirements of every participants and organization and risks managing that are specific are more adapted to exotic options.
- The unique risk aspects are traded and managed.
- Exotic options offer a wide range of products on which investments can be made and the products that will suit their portfolio are also offered.
- There are some instances when exotic options are less expensive than regular options.
Below are listed some exotic options:
- Barrier options
- Shout options
- Binary options
- Compound options
- Look-back options
- Basket options
- Asian options
- Extendible options
- Bermuda options
- Range options
- Spread options
- Chooser options
There a barrier set for underlying assets and when the price of the asset crosses this barrier the investor will get payoffs. The name describes exactly what it does. The payoffs that the investor will be getting depends on exercise price and it does depend on barrier price. Further, the barrier options are divided into two different types:
- A Knock-in Barrier Option:
This option is activated immediately after the underlying reaches the barrier.
- A Known-Out Barrier Option:
This option is inactivated as soon as the underlying reaches the barrier.
The shareholders in shout options type are given an opportunity to secure a certain money got by profit while keeping hold of future upside possibilities on the position.
Let us consider an example:
Assuming that a trader purchases a shouted call option and $200 is its strike price on a stock say XYZ which will expire in a months’ time. Suppose the price of XYZ stock rises to $218, the shareholder who has shout call option will be able to lock this amount following which they will be getting a profit of $18 for sure. Now when the stock expires the stock that is underlying rises further to $225, the shout options payoff the investor will be getting is $25 and on the other hand, if the stock’s payoffs turn out to be $206 during the time of expiry, the stockholder will get $18 on that particular position.
It means that even though the price of the stock XYZ reduces more than the priced on which the holder had locked on, they still will end up getting the locked price and not the reduced price during expiry. Learn more about it and which type of option it uses.