Binary option payoff profile

Binary option payoff profile

In all our articles until now we have focused on the simple put binary option payoff profile call options also known as vanilla options and related strategies. In this last article we will focus on exotic options. Exotic options are characterized by a greater complexity than that of the commonly traded vanilla options.

Vanilla options are considered simple since the payoff profile is continuous and is only dependent on the value of the underlying at expiry. Exotic options are everything else – which is a very large definition. Therefore, in this article we will only focus on the vanilla option with in and out features known as knock-in, knock-out, reverse-knock-in, and reverse-knock-out. Furthermore, we will look at the American digital option one-touch, no-touch, and double-no-touch. The knock-out option functions by being an ordinary vanilla option, put or call, unless a pre-specified barrier level is reached, or touched, before expiry. The option is termed reverse if the barrier is placed where the option is in-the-money.

While the purchaser of the exotic option does gain an exposure similar to the vanilla option, the pricing dynamics do change dramatically. With vanilla options, the price is always increasing with respect to the volatility parameter. However, barrier options can behave quite differently. Another class of exotics options are the American digitals also known as touch options.

They function like bets by paying a predetermined amount if a certain condition is met. The payoff is thus the full amount or nothing, which gives rise to the term digital. Looking at the quotation as the probability of hitting the barrier, we will see for the one-touch option the effect of the varying volatility and black swans, explained in the previous article. In this article we have touched upon the subject of exotic options, there exist many other forms of exotic options such as chooser options, basket options, lookback options, to mention a few of their colorful names. These will be left alone for now. The options explained in this article cover the most heavily traded exotic options which we consider an interesting starting point for most traders. GPSD is widely deployed on laptops, smartphones, and autonomous vehicles including self-driving automobiles and robot submarines.

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