An Australian option is a type of financial derivative that gives the holder the right, but not the duty, to buy or sell an underlying asset at a specified price on or before a predetermined date. These are also known as ‘Australian securities options’ or ‘ASX options’.
Options are classified as either ‘exotic’ or ‘plain vanilla’. Exotic options are those with more complex features than plain vanilla options. For example, an exotic option may have a unique underlying asset, such as a foreign currency or a complicated payoff structure.
Australian options are typically plain vanilla options, meaning that they have a relatively simple structure and do not involve any exotic features. However, some Australian options are classified as exotic options. These options tend to be more complex and may have features such as a non-standard underlying asset or a more complicated payoff structure.
Which Australian options are exotic?
A barrier option is an exotic option with a barrier level, which is the price at which you must exercise the option. If the underlying asset price reaches or exceeds the barrier level, the broker will exercise the option, and the holder will receive a payoff. If the asset price does not reach the barrier level, the broker will not exercise the option, and the holder will not receive a payoff.
A binary option is an exotic option that pays either a fixed amount of cash or nothing. These options are known as ‘all-or-nothing’ options or ‘fixed-return’ options.
A lookback option is an exotic option that gives the holder the right to buy or sell an underlying asset at the lowest price it has reached during the option’s life.
A rainbow option allows the holder the right to buy or sell an underlying asset at a specified price on or before a predetermined date. The holder also has the right to receive a payoff if the asset price does not reach the specified price.
What are the risks of trading exotic options?
They are more complex
Exotic options are more complex than plain vanilla options, making it more challenging to understand them. It can lead to greater risk for the trader as they may not fully understand how the option works.
They often have higher fees
Exotic options often come with higher fees than plain vanilla options because they are more complex and require more work to set up and manage.
They may be less liquid
Exotic options may be less liquid than plain vanilla options, meaning there may be fewer buyers and sellers willing to trade them. It can make finding a buyer or seller more difficult when you want to trade an exotic option.
The underlying assets may be more volatile
The underlying assets of exotic options are often more volatile than the underlying assets of plain vanilla options. Therefore, the asset’s price is more likely to fluctuate sharply. It can make it more difficult to predict where the price will be at the option’s expiration date.
They may have a higher chance of expiring worthless
Exotic options often have a higher chance of expiring worthless than plain vanilla options. They are more complex, and there is a greater chance of something going wrong with them.
Where can Australians trade exotic options?
IG Markets is a global forex and CFD broker that offers Australians the ability to trade a wide range of exotic options.
CMC Markets is an Australian-based CFD and forex broker that offers many exotic options.
Plus500 is a global CFD and forex broker that offers Australians the ability to trade a wide range of exotic options.
AvaTrade is an Irish-regulated forex and CFD broker that offers Australians the ability to trade a wide range of exotic options.
eToro is a platform that offers Australians the ability to trade a wide range of exotic options.
Saxo Bank is a Copenhagen-headquartered investment bank that offers many trading and investing services in Australia, and you can get more information on options on their site. Visit now.
Exotic options are more complex and riskier than plain vanilla options. They often have higher fees and may be less liquid. The underlying assets of exotic options are often more volatile, making it more difficult to predict where the price will be at expiration. Exotic options also have a higher chance of expiring worthless. If you would like to invest in exotic options, make sure you understand how they work before risking your capital.