Let's create our own exotics

Discussion in 'Options' started by .sigma, Apr 16, 2020.

  1. .sigma

    .sigma

    I'm sure you guys are aware that exotic options exist, that there's a world beyond vanilla.

    I feel one day, in the near future, a lot more exotic contracts will be traded by retail and not just OTC (barriers/binary).

    In this thread let's see if we can get creative, I want to create our own payoff structure in a contract.

    First, I'll lay out the exotics and how cool they really are.. Øptionality runs deep.

    Gap Option
    A type of binary options whose stated strike price is different from its payoff strike. That is, there is a gap between the price at which the option can be exercised and the price at which it would produce a payoff to the holder

    Forward Start Options
    Are options that will start at some time in the future. Employee stock options are usually referred to as these.

    Cliquet Option
    Also called a ratchet, or strike reset, is a series of calls/puts with rules for determining the strike price. So over the lifetime of the option you may have the option to change the strikes.

    Compound Option
    Are options on options. There are four main types: call on a call, a put on a call, a call on a put, and a put on a put. Compound options have two strikes and two excersice dates.

    Chooser Options
    After a specific period of time, the holder can choose whether the option is a call or a put.

    Barrier Options
    Are options where the payoff depends on whether the underlying assets price reaches a certain level during a certain period of time. (Knockin/out)

    Binary Options
    Are options with discontinuous payoffs. A simple binary is called a "cash or nothing" call, this pays off nothing if the asset price ends up below the strike price at time T and pays a fixed amount.

    Look-back Options
    The payoffs from look-back depend on the max and min asset price reached during the life of the option.

    And there's a lot more.

    Anywho, I'm going to create my own exotic shit. Let's play.

    Synthetic synthetic Options
    Are options that allow the holder to choose at some point during the life of the option to synthetically alter their position to its opposite. For example, if you sold a put, you could convert that premium into its synthetic equivalent, the covered call. Etc etc. Coolio

    Legged Options
    Are options that allow the holder to leg into another option to create a spread. The difference is it comes at no cost to the trader, the risk is your break even is calculated AGAINST your strike instead. Or some shit lol

    Expirational Options
    Are options that allow the holder to "cut" the amount of days to expiration if he chooses to. So originally you would trade the monthly expiration, but at some time during the life of the trade the holder can "jump" into a weekly expiration with only a few days left to expiration

    Frozen Greek Options
    Not ice cream, but these are options that allow the holder of the options to "freeze" one Greek of his/her choice. For example, the trader can freeze the delta throughout the lifetime of the option, while only theta, gamma, rho, Vega move the premium. Yes gamma is still there, now your delta is gamma, your convexity is crazy yes lol

    Okay yes I'm bored. Anyone got any cool ideas on some risk pay offs of new born øptionality contractz?
     
    Atikon likes this.
  2. Well those are really some interesting types. A good read!
     
    Atikon and .sigma like this.
  3. Atikon

    Atikon

    I like the idea of freezing theta, that would make it a double whammy, because the live span would be reduced (provided you would freeze it at max theta)
     
  4. Atikon

    Atikon

    Do you mean zero theta as in theta is zero? That would be the case in Knockout options right? I meant freezing theta at the tangible/max downward slope->highest Theta in the Options Lifetime :) .
     
    .sigma likes this.
  5. .sigma

    .sigma


    64EAAEA9-1A84-404D-AE27-1F4E86CA70E3.jpeg
     
    Atikon likes this.
  6. Atikon

    Atikon

    What kind of products are forward starting products? If I lookup Futures for the Frontmonth or upcoming Weeklies they all have theta decay
     
    .sigma likes this.
  7. .sigma

    .sigma

    Most likely a forward swaption
     
    Atikon likes this.
  8. traider

    traider

    I like a frozen greek yogurt option.
     
    .sigma likes this.
  9. .sigma

    .sigma

    I would like to see what it’s like to trade barriers, I can see why they are the most liquid of the exotics, and could possibly come over to the retail side eventually (I don’t see why not?)
     
  10. .sigma

    .sigma

    This thread flopped lolol
     
    #10     Apr 23, 2020