Other Types of Options

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Chapter 17 — Other Types of Options
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Other Types of Options

Other Types of Options

Besides the general differences between a call option and a put option, there are many other possible differences in the details of an options contract. Every option is either a call or a put, but they can also be categorized as American or European, Long Term or Short Term, and Exotic or Plain Vanilla.

Options and their types

American vs. European

An American Option can be exercised at any time up to and including its maturity date. This means that if you hold an American option, you have the right to trade the underlying asset any time before the option expires. In contrast, a European Option can only be exercised on the date it matures, meaning that you can only trade the underlying asset on the same day that the option expires.

American Options are far more common that European Options, and also more valuable. American Options usually trade on standardized exchanges while European options are usually traded over the counter. The type of option has nothing to do with geographic location.

Long-Term vs. Short Term

Many traders prefer options with a short-term maturity date because they are anticipating short term price movements. However, there are also options available for long-term investors who want to capture a long term trend. These options, called Long-Term Equity Anticipation Securities (LEAPS), have maturities of longer than one year. They give traders the ability to profit from a long term trend without needing to use an expensive combination of short-term options.

Exotic vs. Plain Vanilla

Beyond the different types of options contracts, there is also a range of variables that can be used for an option contract. An exotic option is one that includes complex or unusual terms, while a plain vanilla option is the standard call or put option described above. Some examples of exotic options are compound options (an option to trade an option!), a barrier option (payout depends on a “barrier” price), or a chooser option (it can be changed from a call to a put). There is no real limit to the amount and type of exotic options.