COMMON TYPES OF EXOTIC OPTIONS
June 13, 2025
Randy S. Kramer


COMMON TYPES OF EXOTIC OPTIONS
Exotic options are exciting and complex. They aren’t plain “vanilla” options by any means.
I’ve recently written a couple of posts about exotic options. Now I will set out some common types.
Common Types of Exotic Options:
► ASIAN OPTIONS: These options derive their payoff from the average price of the underlying asset over a given timeframe, lessening the effect of short-term volatility.
► BARRIER OPTIONS: These options become active ("knock-in") or inactive ("knock-out") when the underlying asset's price hits a specified barrier during the option's duration.
► UP-AND-IN/ DOWN-AND-IN: Activate when the price rises to/falls to a certain barrier.
► UP-AND-OUT/ DOWN-AND-OUT: Become worthless when the price rises to/falls to a certain barrier.
► BINARY OPTIONS (DIGITAL OPTIONS): Provide a fixed payout if a defined condition (e.g., the underlying asset's price surpassing or falling below a set level at expiration) is fulfilled; otherwise, they yield no payment.
• LOOKBACK OPTIONS: Enable the holder to "look back" at a designated period and select the most advantageous price (highest for calls, lowest for puts) as the strike price, granting significant flexibility.
• CHOOSER OPTIONS: Allow the holder to decide, on a predetermined future date, whether the option will be a call or a put.
• COMPOUND OPTIONS: These are “options on options,” meaning the underlying asset of the option is another options contract.
• BASKET OPTIONS: Their payoff is based on the performance of a weighted average of various underlying assets (a "basket" of securities).
• BERMUDA OPTIONS: Can be exercised on specific predetermined dates between the purchase and expiration dates, resulting in a blend of American and European option exercise styles.
• QUANTO OPTIONS: These permit exposure to a foreign asset while maintaining a fixed exchange rate in the investor's home currency, thus eliminating currency risk.
In the next and final post of this series, I’ll weigh the benefits and risks of exotic options.
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