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Vanilla or Exotic Options

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Vanilla or Exotic Options

Which are better to trade, vanilla or exotic options? We define an exotic options contract as one that includes complicated business arrangements or structures as part of the bargain. Vanilla options contracts are all of the rest. In looking at vanilla or exotic options we are not differentiating European style options from American style stock options. These styles only differ in when the options contract can be executed. A closer fit to an exotic options contract is in trading compound options, the option within an option arrangement. An excellent example of an exotic option is the rainbow option.

Vanilla or Exotic Options and the Rainbow Option

A vanilla options contract gives the buyer the right to buy in the case of a call and sell in the case of a put. A vanilla stock options contract typically contains one hundred shares of stock. At issue is whether the price of the one stock will rise or fall and to what degree. One difference between vanilla and exotic options lies in rainbow options. Just as a rainbow has many colors, a rainbow option contains many sources of risk. Strictly speaking a rainbow option may only have two things that can vary but there may be more. Traders do not base the contract results on the value of each and every equity in the trade basket. Rather, as an example, payment is based on the performance of the best performing or worst performing in the basket of equities under consideration.

A slang term for the number of equities under consideration is the number of colors of the rainbow. In addition, a rainbow options trade may be a correlation trade as payment may depend upon the price relationships between various members of the set of equities. In fact, a rainbow option may not even be based on equities. These types of options are often used when dealing with deposits of natural resources. A common approach is to base the contract on resource price and resource quantity at a given point in time.

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  • 1. Vanilla or Exotic OptionsBy www.options-trading-education.com
  • 2. Which are better to trade,vanilla or exotic options? We define an exotic options http://www.options-trading-education.com/7096/vanilla-or-exotic-options/
  • 3. contract as one that includes complicated businessarrangements or structures as part of the bargain. http://www.options-trading-education.com/7096/vanilla-or-exotic-options/
  • 4. Vanilla options contracts are all of the rest. In looking at vanilla or exotic options we are not differentiatingEuropean style options fromAmerican style stock options. http://www.options-trading-education.com/7096/vanilla-or-exotic-options/
  • 5. These styles only differ inwhen the options contract can be executed. http://www.options-trading-education.com/7096/vanilla-or-exotic-options/
  • 6. A closer fit to an exoticoptions contract is in trading compound options, http://www.options-trading-education.com/7096/vanilla-or-exotic-options/
  • 7. the option within an option arrangement. http://www.options-trading-education.com/7096/vanilla-or-exotic-options/
  • 8. An excellent example of anexotic option is the rainbow option. http://www.options-trading-education.com/7096/vanilla-or-exotic-options/
  • 9. Vanilla or Exotic Options and the Rainbow Option http://www.options-trading-education.com/7096/vanilla-or-exotic-options/
  • 10. A vanilla options contractgives the buyer the right tobuy in the case of a call and sell in the case of a put. http://www.options-trading-education.com/7096/vanilla-or-exotic-options/
  • 11. A vanilla stock optionscontract typically contains one hundred shares of stock. http://www.options-trading-education.com/7096/vanilla-or-exotic-options/
  • 12. At issue is whether the priceof the one stock will rise or fall and to what degree. http://www.options-trading-education.com/7096/vanilla-or-exotic-options/
  • 13. One difference betweenvanilla and exotic options lies in rainbow options. http://www.options-trading-education.com/7096/vanilla-or-exotic-options/
  • 14. Just as a rainbow has many colors, a rainbow optioncontains many sources of risk. http://www.options-trading-education.com/7096/vanilla-or-exotic-options/
  • 15. Strictly speaking a rainbow option may only have twothings that can vary but there may be more. http://www.options-trading-education.com/7096/vanilla-or-exotic-options/
  • 16. Traders do not base thecontract results on the value of each and every equity in the trade basket. http://www.options-trading-education.com/7096/vanilla-or-exotic-options/
  • 17. Rather, as an example,payment is based on theperformance of the besthttp://www.options-trading-education.com/7096/vanilla-or-exotic-options/
  • 18. performing or worst performing in the basket ofequities under consideration. http://www.options-trading-education.com/7096/vanilla-or-exotic-options/
  • 19. A slang term for the number of equities underconsideration is the number of colors of the rainbow. http://www.options-trading-education.com/7096/vanilla-or-exotic-options/
  • 20. In addition, a rainbow options trade may be a correlationtrade as payment may depend http://www.options-trading-education.com/7096/vanilla-or-exotic-options/
  • 21. upon the price relationshipsbetween various members of the set of equities. http://www.options-trading-education.com/7096/vanilla-or-exotic-options/
  • 22. In fact, a rainbow option may not even be based on equities. http://www.options-trading-education.com/7096/vanilla-or-exotic-options/
  • 23. These types of options areoften used when dealing withdeposits of natural resources. http://www.options-trading-education.com/7096/vanilla-or-exotic-options/
  • 24. A common approach is tobase the contract on resourceprice and resource quantity at a given point in time. http://www.options-trading-education.com/7096/vanilla-or-exotic-options/
  • 25. Analysis with Vanilla or Exotic Options http://www.options-trading-education.com/7096/vanilla-or-exotic-options/
  • 26. If you are buying or selling calls on a stock on the NewYork Stock Exchange you will http://www.options-trading-education.com/7096/vanilla-or-exotic-options/
  • 27. look at the fundamentals ofthe company involved and use technical analysis to get a sense of market sentiment. http://www.options-trading-education.com/7096/vanilla-or-exotic-options/
  • 28. Then you will look at currentequity and options price and trade accordingly. http://www.options-trading-education.com/7096/vanilla-or-exotic-options/
  • 29. With exotic options such as arainbow option, traders will likewise examine fundamentals http://www.options-trading-education.com/7096/vanilla-or-exotic-options/
  • 30. but then they will need to setup a price matrix that reflects the many variables and possible collections of variables that may occur. http://www.options-trading-education.com/7096/vanilla-or-exotic-options/
  • 31. Each possible outcome needs to be priced and the probability of that outcome needs to be determined. http://www.options-trading-education.com/7096/vanilla-or-exotic-options/
  • 32. While either vanilla or exoticoptions may be profitable to trade the degree ofcomplexity of exotic optionsoften is a deterrent for most traders. http://www.options-trading-education.com/7096/vanilla-or-exotic-options/
  • 33. It is not that figuring these options out is so difficult butthe amount of work may be a http://www.options-trading-education.com/7096/vanilla-or-exotic-options/
  • 34. deterrent and, in the case of things like natural resource deposits, the amount of http://www.options-trading-education.com/7096/vanilla-or-exotic-options/
  • 35. expertise required to make anintelligent choice may not be available. http://www.options-trading-education.com/7096/vanilla-or-exotic-options/
  • 36. There may be times in trading exotic options that basic options strategies simply do not apply. http://www.options-trading-education.com/7096/vanilla-or-exotic-options/

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