The 1990s brought with them a very rapid development of markets which consequently led to the occurrence of very frequent phenomena of high volatility in financial variables which have managed in some way to contribute to the spread of increasingly sophisticated financial engineering products.
Among the many products and instruments, we find exotic options which are characterized purely by the simple fact of containing a simple conditional element that determines the value of the option itself.
Options, in themselves, have a very important financial function that affects both the operations of companies and banks; options are a tool on which the numerous trading and risk management strategies are based. The discussion of these can be divided into four main sections where:
Exotic options are all those options that present a much more complex payoff and different contractual forms than standard and classic options called "plain vanilla".
Exotic options have had considerable success over time, thanks above all to the flexibility that has allowed, and still allows, the coverage of some specific complex payoff positions, the strength of the offer and of the distribution network with regard to financial intermediaries; on the other hand, they have pushed the placement of products with high profit margins, especially in an era in which the reduction in interest rates has been faced. All this with a significant cost advantage over the classic ordinary options.
Proposing a single classification regarding exotic options is almost impossible because such securities are present in the market in different types of forms, also considering that the innovation and dynamism of current markets allow the creation over time of increasingly articulated financial instruments.
Considering the wide range of these instruments to some essential characteristics, this can distinguish and classify some categories of exotic options:
Asian options (average strike and average price), present themselves with a pay-off that depends very much on the average, whether arithmetic, geometric or weighted, of the price over a specific reference period.
Exotic options have a pay-off that is strictly linked to the price of the underlying asset, which can depend on the minimum and maximum price during a given period (lookback), on reaching a threshold that has already been established previously relating to the price of the underlying asset (ladder, barrier), on changing the strike price (reset-strike, deferred-strike, installment).
Options that have a pay-off that looks like a dedicated contract or another option (forward-start, packages, chooser, compound, swaption and caption).
Options with a pay-off that is not strictly linked to the exercise price but to a region of exercise, such as digital or binary options.
We find those with a pay-off that depends very much on the price of multiple stocks together (exchange and rainbow).
Pay-off options that are determined by the difference in the prices or yields of different financial assets, such as interest rates of two different currencies or as interest rates on two different maturities (spreads) or equity indices or bonds (outperformance).
We find options with pay-offs in a different currency than the one in which the option is denominated (how much and differential swart).
In short, thanks to their particular characteristic, in recent times, interest in exotic options has increased considerably.
Options, in the financial sphere, represent a sort of financial contract that gives the buyer not the obligation but the right to buy or sell (possibility and therefore option) shares, indices, interest rates, credits, raw materials, goods and other financial assets with a certain quantity and at a certain price, in jargon called "strike" by a specific date, against a premium already paid and no longer recoverable.
In general, stock options were first listed in the United States of America since 1973 and today represent one of the most versatile financial instruments as they allow a large number of investment strategies and use to achieve a number of very different objectives. Now that we have understood what options are generally for, let's see what we call options on indices and stocks, how it works and what its strengths are.
Binary trading is actually much more complex than detractors and those who only talk about it by hearing it say: today we discover what charts are and how they can be used, a fundamental tool for investing more carefully.
Simple (and dangerous) gambling. This is one of the strongest accusations that is frequently made against the binary options system, the type of online trading that has been most successful and widespread in recent years. Both charges, however, can be somewhat disassembled from a deeper understanding of the mechanisms of functioning of this world, poking over promotional sites and reading instead blogs and specialized forums such as Binary Options 60, where you can start studying the wide range of tools that investors have at their disposal and understand, for example, what binary option charts are, how to read them and, above all, how they can help our strategies.
No co-in-flip. Yes, we are talking about strategies because, unlike "betting", for binary trading the chances of victory (and gain) are not only entrusted to fate, but the component of study and the ability to guess the behavior of the market predominates. If, therefore, the extreme simplicity of operation of the mechanism and platforms can attract even novices and inexperienced finance, it is instead the case not to approach with too much superficiality to the investment, also because the losses can be really substantial. It is essential to understand, therefore, that binary options trading is a real financial instrument, with its own rules, difficulties and instruments.
A help from the cards. Understanding binary options charts is therefore essential to our strategy: these charts provide the appropriate information about the current and historical performance of the asset in a particular market solution, helping traders to determine (or at least to assume) the behaviour of that asset in the future. These graphs offer information on every data and, precisely, in a graphic way and, once learned the operation, also simple to display: there are line or bar charts and, the most famous, candle cards. In any case, all are united by the wealth of data they make available, as well as by a generally similar approach: if for example we are interested in the movement of prices over time, we will find the numbers on the Y axis that show the price and those on the X axis that instead represent the time of day or date. Furthermore, these graphs use special signs of "highlighting" key moments in the history of the asset (maximum or minimum price point, forecasts, changes in a time interval, etc.) that are therefore immediately before the eyes of the observer.
Customization. Most graphs allow you to analyze directly even more goods in "contrast": If, for example, you are trading binary options on Euro-dollar trades, you can set a chart with the values of these two currencies to make the best trading decisions, while still if you are acting with a stock option, we can enter the stock index to see how that stock is moving at the moment and how it moved in the past.
Lines and candles. Charts play a very important role because from their reading you can get indications on the best time to make a call when the price is rising or falling, or rely on the history to understand the behavior of an asset. The most common and appreciated forms, as mentioned, are the line and candle graphs: the former report continuously the updating and the trend implements
Online trading is a fascinating world. The reason why more and more people are trying to make money in this world is because at first glance it seems easier than other methods.
We have seen how, in the field of technical analysis, it is also necessary to consider in depth the psychological aspect that in fact can influence the market even in a more than decisive way.
Before we talk about Strike price we need to take a small look at some concepts related to call and put options.