Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Exotic Option

What it is:

An exotic option is any option contract comprising attributes not common to most contracts which result in complicated valuation schemes. It is the opposite of a plain vanilla option.

How it works (Example):

Exotic options contain complex criteria affecting valuation and payoff. In many cases these criteria are time-sensitive and allow the holder to exercise specific preferences at various points prior to the expiration date. Examples of exotic options include Asian options (strike price is based on the projected average price of the underlying asset over a specific interval) and compound options (underlying asset is another option). Exotic options should not be confused with plain vanilla options, which only contain a specific strike price, expiration date, and underlying asset.

Why it Matters:

The complexities associated with exotic options make them difficult to trade on an exchange. As a result, most exotic options are traded in the over-the-counter (OTC) market.