Guide to various option styles

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In finance, an option is a type of derivative. The options can be classified in several ways. In a very general classification, they can be divided into two groups: the vanilla which consist of basic options contracts call or put and exotic that incorporate more complex variants.

Vanilla options

Options is basic that depending on the type of law that give us are call options (to buy) and put options (sold). Depending on your way of being exercised we can differentiate:

European option: can only be exercised on a specific date (exercise date).
American option: can be exercised throughout his life until the exercise date.

The method mostly used to value European options is the Black-Scholes. For American options, which are rarely exercised before the date of exercise, you can use the same method , assuming that their behavior is similar. The work of Myron Scholes and Fisher Black, was subsequently improved by Robert C. Incorporating Merton

Exotic options

These are options that are more complex than commonly traded options (plain vanilla). These products are usually traded over-the-counter (OTC).

They incorporate different variants that can complicate the calculation of the value of the option by far. In many cases, to value is used to generate random numbers based on the Monte Carlo statistical method.

  • Asian option: depends on the average value of the underlying over a given period .
  • Lookback option: calculated on the basis of maximum (or minimum) value achieved by the underlying period. Variants: Russian option (Russian option) is a lookback option is operational in perpetuity.
  • Binary or digital option: payment can be a certain amount (or asset) or on the contrary, have no payment at all.
  • Swing option: the buyer can swing the underlying price. Mainly used in energy.
  • Parisian option: depends on how long the asset is above (or below) the strike .
  • Bermudan option: exercised at various points in time, such as quarterly. Variants: Canary option is an option straddling a classic European option and bermuda;  exercised at various times but never before a fixed period, eg one year.
  • Barrier option: the option ceases to exist (knock-out) or comes into existence (knock in) when the underlying reaches (or crosses ) a certain value (barrier level). You can give different combinations:
  • Capped-style option: the option is automatically executed when the underlying reaches a certain price and sets a new mark to market . It has nothing to do , despite its name, with an interest rate cap .
  • Compound option: is an option on another option, assuming, there are two dates and different modes of exercise .

Depending on the underlying:

Basket option is based on a weighted average of several underlying. Variants: Rainbow option is based on a basket in which the weighting of the components depend on their final behavior. For example, a special case of this type is quite common option is an option based on the worst performing underlying ‘ve had in a basket . Other variants : Himalayan option, mountain range option …

Exchange option: an asset is exchanged for another.

Composite option: the underlying trades in one currency and the stike is denominated in another . Variant: Quanto option is an option in which the exchange rate is fixed from the beginning, for example.

Game / Israeli option: the buyer can cancel the option , affecting this to pay off or having to pay some kind of “fine” .
Reoption : the possibility to renew an option that expired without being exercised.
Chooser option: the option to decide whether it will be put or call option .
Forward starting option: the strike is decided in the future, not at the beginning of the contract . Variants: cliquet option is a sequence of forward starting options.

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