Exotic Option


DEFINITION of 'Exotic Option'

An option that differs from common American or European options in terms of the underlying asset or the calculation of how or when the investor receives a certain payoff. These options are more complex than options that trade on an exchange, and generally trade over the counter.

BREAKING DOWN 'Exotic Option'

For example, one type of exotic option is known as a chooser option. This instrument allows an investor to choose whether the options is a put or call at a certain point during the option's life. Because this type of option can change over the holding period, it is not be found on a regular exchange, which is why it is classified as an exotic option.

Other types of exotic options include: barrier options, Asian options, digital options and compound options, among others.

  1. Asian Option

    An option whose payoff depends on the average price of the underlying ...
  2. Barrier Option

    A type of option whose payoff depends on whether or not the underlying ...
  3. Compound Option

    An option for which the underlying is another option. Therefore, ...
  4. Cliquet

    An extended exotic option that periodically settles and resets ...
  5. Quantity-Adjusting Option - Quanto ...

    A cash-settled, cross-currency derivative in which the underlying ...
  6. Bermuda Option

    A type of exotic option that can be exercised only on predetermined ...
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  1. What do all of the letters in a stock option ticker symbol mean?

    The option ticker explains four main things about the option: the underlying stock, whether it is a call or a put option, ... Read Full Answer >>
  2. What's the difference between a regular option and an exotic option?

    Before learning about exotic options, you should have a fairly good understanding of regular options. Both types of options ... Read Full Answer >>
  3. How do hedge funds use equity options?

    With the growth in the size and number of hedge funds over the past decade, the interest in how these funds go about generating ... Read Full Answer >>
  4. Can mutual funds invest in options and futures?

    Mutual funds invest in not only stocks and fixed-income securities but also options and futures. There exists a separate ... Read Full Answer >>
  5. How does a forward contract differ from a call option?

    Forward contracts and call options are different financial instruments that allow two parties to purchase or sell assets ... Read Full Answer >>
  6. How can an investor profit from a fall in the utilities sector?

    The utilities sector exhibits a high degree of stability compared to the broader market. This makes it best-suited for buy-and-hold ... Read Full Answer >>

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