Exotic Option

You were amiably chatting with your travel agent, discussing another conventional cruise, or perhaps a repeat of last year's sojourn to Disney World, when he suddenly becomes quiet and thoughtful. The mood in the room turns first awkward and then slightly ominous. Eventually, he leans in, a conspiratorial glint in his eye. "You know," he says, his voice quiet. "If you're tired of the usual holiday doldrums, I have a suggestion for you..." He pauses theatrically, and then, his voice dripping with a sense of implied danger, whispers a dark invitation: "there's always...the exotic option."

Better leave the kids at home for that one.

In financial terms, "exotic options" refer to specific types of bets that can be made in the futures market.

In general, options provide people with the right, but not the obligation, to do something at some point in the future. You might acquire an option to buy stock in a month's time at $X a share, or to sell oil at $Y a barrel.

The plain, regular, decidedly-not-exotic types of these bets are known as "vanilla" options. The most common varieties are calls and puts.

Calls allow the buyer to purchase a certain asset, like a stock or a commodity, at a certain price at a certain point of time. Like, a call option to buy 100 shares of Apple at $190 a share a month from now.

A put is the opposite bet, giving the option to sell a stock (or whatever asset) at a certain price at certain point in time. Like a put for the sale of 200 barrels of oil at $72 a barrel.

Exotic options are the ones that get weird. Because the definition is basically "non-standard option," the category includes pretty much anything that's off the beaten track. Sometimes financial firms create options to order for particular clients. Sometimes, exotic options consist of a combination of other options (say, a call at one strike price and a put at a different price).

Exotic options tend to be more complex, and tend to point to more specific scenarios. Not just "I'll make money if the stock goes up above $25," but something like "I'll make money if the stock rises above $25 but doesn't reach $30, with a hedge in place if the stock falls anywhere below $20."