http://www.options-trading-education.com/7096/vanilla-or-exotic-options/ 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.

1. Vanilla or Exotic Options
By 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 business
arrangements 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 differentiating
European style options from
American style stock options.
http://www.options-trading-education.com/7096/vanilla-or-exotic-options/

5. These styles only differ in
when the options contract can
be executed.
http://www.options-trading-education.com/7096/vanilla-or-exotic-options/

6. A closer fit to an exotic
options 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 an
exotic 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 contract
gives the buyer the right to
buy 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 options
contract typically contains one
hundred shares of stock.
http://www.options-trading-education.com/7096/vanilla-or-exotic-options/

12. At issue is whether the price
of 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 between
vanilla 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 option
contains many sources of risk.
http://www.options-trading-education.com/7096/vanilla-or-exotic-options/

15. Strictly speaking a rainbow
option may only have two
things that can vary but there
may be more.
http://www.options-trading-education.com/7096/vanilla-or-exotic-options/

16. Traders do not base the
contract 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 the
performance of the best
http://www.options-trading-education.com/7096/vanilla-or-exotic-options/

18. performing or worst
performing in the basket of
equities under consideration.
http://www.options-trading-education.com/7096/vanilla-or-exotic-options/

19. A slang term for the number
of equities under
consideration 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 correlation
trade as payment may depend
http://www.options-trading-education.com/7096/vanilla-or-exotic-options/

21. upon the price relationships
between 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 are
often used when dealing with
deposits of natural resources.
http://www.options-trading-education.com/7096/vanilla-or-exotic-options/

24. A common approach is to
base the contract on resource
price 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 New
York Stock Exchange you will
http://www.options-trading-education.com/7096/vanilla-or-exotic-options/

27. look at the fundamentals of
the 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 current
equity and options price and
trade accordingly.
http://www.options-trading-education.com/7096/vanilla-or-exotic-options/

29. With exotic options such as a
rainbow option, traders will
likewise examine
fundamentals
http://www.options-trading-education.com/7096/vanilla-or-exotic-options/

30. but then they will need to set
up 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 exotic
options may be profitable to
trade the degree of
complexity of exotic options
often 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 but
the 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 an
intelligent 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/