Exotic Options
Exotic options are highly specialised Forex tools that enable you to tailor your
trading strategies for specific situations. You should feel extremely
confident in your fundamental and technical analysis skills before you
begin trading exotic options for while they can be quite lucrative for
experienced traders, they can be too risky for brand-new traders.
Vanilla option traders often use exotic options to compliment
their vanilla option trades or in situations when a vanilla option
just isn't feasible. Oftentimes, Forex traders find that premiums
for exotic options are cheaper than premiums
for vanilla options because
they can customise exotic options more precisely, with more variables.
Exotic options are not available on every currency pair. Only those currency pairs that are traded actively enough qualify.
Explore each of the following exotic options, and see if you can identify opportunities in your trading to use an exotic option:
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Knock-In Call Options |
A knock-in call option is an option that automatically becomes a
normal vanilla call option when the underlying currency pair trades
at or beyond a specified price level (barrier) before expiry. In
other words, you get knocked into a vanilla call option if the currency pair touches a certain price.
Traders use knock-in call options when they believe a
currency pair is going to go up before the option expires
but not before it experiences some volatility and goes down
before it goes up again. Here's how it works. You will be
profitable with a knock-in call option if the currency pair
drops down to and touches the barrier, knocks you into the
vanilla call option and then turns around and rises up past
the strike price and the breakeven price before the option expires.
For example, imagine you buy a knock-in call option on the
EUR/USD with a strike price of 1.4100, a barrier of 1.4000
and a breakeven point of 1.4150. If the EUR/USD currency
pair drops down to the barrier at 1.4000, knocks you into the
vanilla call option and then turns around and moves back up above
the breakeven point at 1.4150, you will be profitable on your knock-in call option trade.
You can see a risk graph for a knock-in call option below. Remember
that the risk graph only looks like this if the currency pair drops
down to the barrier and knocks you into the vanilla call option.
Otherwise, the risk graph would be blank because you would never have been knocked in.
When you trade a knock-in call option, one of the following four things will happen:
Maximum gain - The currency pair drops down to the barrier,
knocks you into the vanilla call option and then turns around and rises up past the strike
price and the breakeven price before the option expires.
Minimised losses - The currency pair drops down to the barrier,
knocks you into the vanilla call option and then turns around and rises up past the strike price
but not above the breakeven price before the option expires.
Maximised losses - The currency pair drops down to the
barrier, knocks you into the vanilla call option and then never turns
around and rises up past the strike price before the option expires.
Maximised losses without being knocked in - The currency
pair never drops down to the barrier to knock you into the vanilla call option before the option expires.
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Knock-In Put Options |
A knock-in put option is an option that automatically becomes a normal
vanilla put option when the underlying currency pair trades at or beyond
a specified price level (barrier) before expiry. In other words, you get
knocked into a vanilla put option if the currency pair touches a certain price.
Traders use knock-in put options when they believe a currency pair is
going to go down before the option expires but not before it experiences
some volatility and goes up before it goes down again. Here's how it works.
You will be profitable with a knock-in put option if the currency pair
rises up to and touches the barrier, knocks you into the vanilla put option
and then turns around and falls down past the strike price and the breakeven price before the option expires.
For example, imagine you buy a knock-in put option on the USD/CHF with a strike
price of 1.1300, a barrier of 1.1400 and a breakeven point of 1.1250. If the USD/CHF
currency pair rises up to the barrier at 1.1400, knocks you into the vanilla
put option and then turns around and moves back down below the breakeven point
at 1.1250, you will be profitable on your knock-in put option trade.
You can see a risk graph for a knock-in put option below. Remember that the
risk graph only looks like this if the currency pair rises up to the barrier
and knocks you into the vanilla put option. Otherwise, the risk graph would
be blank because you would never have been knocked in.
When you trade a knock-in put option, one of the following four things will happen:
Maximum gain - The currency pair rises up to the barrier,
knocks you into the vanilla put option and then turns around and falls down past the strike
price and the breakeven price before the option expires.
Minimised losses - The currency pair rises up to the
barrier, knocks you into the vanilla put option and then turns around and falls down
past the strike price but not below the breakeven price before the option expires.
Maximised losses - The currency pair rises up to the
barrier, knocks you into the vanilla put option and then never turns around and
falls down past the strike price before the option expires.
Maximised losses without being knocked in - The currency
pair never rises up to the barrier to knock you into the vanilla put option before the option expires.
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Knock-Out Call Options |
A knock-out call option is an option that automatically expires worthless
when the underlying currency pair trades at or beyond a specified price
level (barrier) before expiry. In other words, you get knocked out of a
vanilla call option if the currency pair touches a certain price.
Traders use knock-out call options when they believe a currency pair is
going to go up and that it is going to remain above a fixed level of support
until the option expires. You will be profitable with a knock-out call
option if the currency pair stays above the barrier, leaves you in
the vanilla call option and rises up past the strike price and the breakeven price before the option expires.
For example, imagine you buy a knock-out call option on the EUR/USD
with a strike price of 1.4100, a barrier of 1.4000 and a breakeven
point of 1.4150. If the EUR/USD currency pair remains above the
barrier at 1.4000, keeps you in the vanilla call option and moves up
above the breakeven point at 1.4150, you will be profitable on your knock-out call option trade.
You can see a risk graph for a knock-out call option below. Remember that
the risk graph only looks like this if the currency pair remains
above the barrier and keeps you in the vanilla call option.
Otherwise, the risk graph would be blank because you would have been knocked out of the vanilla call option.
When you trade a knock-out call option, one of the following four things will happen:
Maximum gain - The currency pair remains above the barrier,
keeps you in the vanilla call option and rises up past the strike price and the breakeven price before the option expires.
Minimised losses - The currency pair remains above
the barrier, keeps you in the vanilla call option and rises up past the strike
price but not above the breakeven price before the option expires.
Maximised losses - The currency pair remains above
the barrier, keeps you in the vanilla call option and then never rises up past
the strike price before the option expires.
Maximised losses by being knocked out - The currency
pair drops down to the barrier and knocks you out of the vanilla call option before the option expires.
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Knock-Out Put Options |
A knock-out put option is an option that automatically expires
worthless when the underlying currency pair trades at or beyond a
specified price level (barrier) before expiry. In other words, you get
knocked out of a vanilla put option if the currency pair touches a certain price.
Traders use knock-out put options when they believe a currency pair is
going to go down and that it is going to remain below a fixed level of
resistance until the option expires. You will be profitable with a knock-out
put option if the currency pair stays below the barrier, leaves you in the
vanilla put option and falls down past the strike price and the breakeven price before the option expires.
For example, imagine you buy a knock-out put option on the USD/CHF
with a strike price of 1.1300, a barrier of 1.1400 and a breakeven
point of 1.1250. If the USD/CHF currency pair remains below the barrier
at 1.1400, keeps you in the vanilla put option and moves down below the
breakeven point at 1.1250, you will be profitable on your knock-out put option trade.
You can see a risk graph for a knock-out put option below. Remember
that the risk graph only looks like this if the currency pair remains
below the barrier and keeps you in the vanilla put option. Otherwise,
the risk graph would be blank because you would have been knocked out of the vanilla put option.
When you trade a knock-out put option, one of the following four things will happen:
Maximum gain - The currency pair remains below the barrier,
keeps you in the vanilla put option and falls down past the strike price and the breakeven price before the option expires.
Minimised losses - The currency pair remains below the
barrier, keeps you in the vanilla put option and falls down past the strike price but not below the
breakeven price before the option expires.
Maximised losses - The currency pair remains below
the barrier, keeps you in the vanilla put option and then never falls down past the strike price before the option expires.
Maximised losses by being knocked out - The currency
pair rises up to the barrier and knocks you out of the vanilla put option before the option expires.
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Double Knock-In Call Options |
A double knock-in call option is an option that automatically
becomes a normal vanilla call option when the underlying currency
pair trades at or beyond one of two specified price levels (barriers)
before expiry. In other words, you get knocked into a vanilla call option if the currency pair touches either one of two predetermined prices.
Traders use double knock-in call options when they believe a
currency pair is going to go up before the option expires
but not before it experiences some volatility and either
goes down before it goes up again or goes up dramatically. Here's
how it works. You will be profitable with a double knock-in call
option if one of the following two things happens:
- The currency pair drops down to and touches the lower barrier,
knocks you into the vanilla call option and then turns around and
rises up past the strike price and the breakeven price before the option expires.
- The currency pair rises dramatically and touches the upper barrier,
knocks you into the vanilla call option and then remains above the breakeven price until the option expires.
For example, imagine you buy a double knock-in call option on
the EUR/USD with a strike price of 1.4100, a lower barrier of
1.4000, an upper barrier of 1.4200 and a breakeven point of
1.4150. If the EUR/USD currency pair drops down to the lower
barrier at 1.4000, knocks you into the vanilla call option and
then turns around and moves back up above the breakeven point
at 1.4150, you will be profitable on your knock-in call option trade.
You will also be profitable if the EUR/USD currency pair rises up to
the upper barrier at 1.4200, knocks you into the vanilla call option and then remains above the breakeven point at 1.4150 until expiration.
You can see a risk graph for a double knock-in call option below. Remember
that the risk graph only looks like this if the currency pair
either drops down to the lower barrier and knocks you into the
vanilla call option or if it rises up to the upper barrier and
knocks you into the vanilla call option. Otherwise, the risk graph
would be blank because you would never have been knocked in.
[NEED IMAGE]
When you trade a double knock-in call option, one of the following four things will happen:
Maximum gain - One of the following two things happens:
- The currency pair drops down to the lower barrier, knocks you into the vanilla call
option and then turns around and rises up past the strike price and the breakeven price before the option expires.
- The currency pair rises up to the upper barrier, knocks you into the vanilla call option
and then remains above the breakeven price before the option expires.
Minimised losses - One of the following two things happens:
- The currency pair drops down to the lower barrier, knocks
you into the vanilla call option and then turns around and rises
up past the strike price but not above the breakeven price before the option expires.
- The currency pair rises up to the upper barrier, knocks you
into the vanilla call option and then drops below the breakeven
price but remains above the strike price before the option expires.
Maximised losses - One of the following two things happens:
- The currency pair drops down to the lower barrier, knocks
you into the vanilla call option and then never turns around to
rise up past the strike price before the option expires.
- The currency pair rises up to the upper barrier, knocks you
into the vanilla call option and then drops below the breakeven price and the strike price before the option expires.
Maximised losses without being knocked in - One of the following two things happens:
- The currency pair never drops down to the lower barrier to knock you into the vanilla call option before the option expires.
- The currency pair never rises up to the upper barrier to knock you into the vanilla call option before the option expires.
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Double Knock-In Put Options |
A double knock-in put option is an option that automatically
becomes a normal vanilla put option when the underlying currency
pair trades at or beyond one of two specified price levels
(barriers) before expiry. In other words, you get knocked
into a vanilla put option if the currency pair touches either one of two predetermined prices.
Traders use double knock-in put options when they believe a
currency pair is going to go down before the option expires but
not before it experiences some volatility and either goes up before
it goes down again or goes down dramatically. Here's how it works.
You will be profitable with a double knock-in put option if one of the following two things happens:
- The currency pair rises up to and touches the upper barrier, knocks
you into the vanilla put option and then turns around and falls down past
the strike price and the breakeven price before the option expires.
- The currency pair falls dramatically and touches the lower barrier, knocks
you into the vanilla put option and then remains below the breakeven price until the option expires.
For example, imagine you buy a double knock-in put option on the USD/CHF
with a strike price of 1.1300, an upper barrier of 1.1400, a lower barrier
of 1.1200 and a breakeven point of 1.1250. If the USD/CHF currency pair
rises up to the upper barrier at 1.1400, knocks you into the vanilla
put option and then turns around and moves back down below the breakeven
point at 1.1250, you will be profitable on your knock-in put option trade.
You will also be profitable if the USD/CHF currency pair falls down to the
lower barrier at 1.1200, knocks you into the vanilla put option and
then remains below the breakeven point at 1.1250 until expiration.
You can see a risk graph for a double knock-in put option below. Remember
that the risk graph only looks like this if the currency pair either drops
down to the lower barrier and knocks you into the vanilla put option or if
it rises up to the upper barrier and knocks you into the vanilla put option.
Otherwise, the risk graph would be blank because you would never have been knocked in.
When you trade a double knock-in put option, one of the following four things will happen:
Maximum gain - One of the following two things happens:
- The currency pair rises up to the upper barrier,
knocks you into the vanilla put option and then turns around
and falls down past the strike price and the breakeven price before the option expires.
- The currency pair falls down to the lower barrier,
knocks you into the vanilla put option and then remains below the breakeven price before the option expires.
Minimised losses - One of the following two things happens:
- The currency pair rises up to the upper barrier,
knocks you into the vanilla put option and then turns around
and falls down past the strike price but not below the breakeven price before the option expires.
- The currency pair falls down to the lower barrier, knocks
you into the vanilla put option and then rises above the breakeven price but remains below the strike price before the option expires.
Maximised losses - One of the following two things happens:
- The currency pair rises up to the upper barrier,
knocks you into the vanilla put option and then never turns around to fall down past the strike price before the option expires.
- The currency pair falls down to the lower barrier,
knocks you into the vanilla put option and then rises above the breakeven price and the strike price before the option expires.
Maximised losses without being knocked in - One of the following two things happens:
- The currency pair never rises up to the upper barrier to knock you into the vanilla put option before the option expires.
- The currency pair never falls down to the lower barrier to knock you into the vanilla put option before the option expires.
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Double Knock-Out Call Options |
A double knock-out call option is an option that automatically expires
worthless when the underlying currency pair trades at or beyond one of two
specified price levels (barriers) before expiry. In other words, you get
knocked out of a vanilla call option if the currency pair touches either one of two predetermined prices.
Traders use double knock-out call options when they believe a currency pair
is going to go up before the option expires but that it is not going to
go up or down too far. Here's how it works. You will be profitable with
a double knock-out call option if the currency pair rises above the
breakeven price but does not touch the upper barrier before the option expires.
For example, imagine you buy a double knock-out call option on the
EUR/USD with a strike price of 1.4100, a lower barrier of 1.4000, an
upper barrier of 1.4200 and a breakeven point of 1.4150. If the EUR/USD
currency pair rises above the breakeven price at 1.4150 while remaining
below the upper barrier at 1.4200, you will be profitable.
You can see a risk graph for a double knock-out call option below.
Remember that the risk graph only looks like this if the currency pair
remains above the lower barrier and below the upper barrier. Otherwise,
the risk graph would be blank because you would have been knocked out of the option.
When you trade a double knock-out call option, one of the following five things will happen:
Maximum gain - The currency pair rises above the breakeven
price but remains below the upper barrier, keeping you in the option until it expires.
Minimised losses - The currency pair rises above the
strike price but remains below the breakeven price, keeping you unprofitably in the option until it expires.
Maximised losses - The currency pair falls below the
strike price but remains above the lower barrier, keeping you unprofitably in the option until it expires.
Maximised losses by being knocked out - The currency
pair falls down to the lower barrier and knocks you out of the vanilla call option before the option expires.
Maximised losses by being knocked out - The currency
pair rises up to the upper barrier and knocks you out of the vanilla call option before the option expires.
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Double Knock-Out Put Options |
A double knock-out put option is an option that automatically
expires worthless when the underlying currency pair trades at or
beyond one of two specified price levels (barriers) before expiry.
In other words, you get knocked out of a vanilla put option if the currency pair touches either one of two predetermined prices.
Traders use double knock-out put options when they believe a currency
pair is going to go down before the option expires but that it is not
going to go up or down too far. Here's how it works. You will be profitable
with a double knock-out put option if the currency
pair falls below the breakeven price but does not touch the lower barrier before the option expires.
For example, imagine you buy a double knock-out put option on the
USD/CHF with a strike price of 1.1300, a lower barrier of 1.1200, an
upper barrier of 1.1400 and a breakeven point of 1.1250. If the USD/CHF
currency pair falls below the breakeven price at 1.1250 while remaining above the lower barrier at 1.1200, you will be profitable.
You can see a risk graph for a double knock-out put option below. Remember
that the risk graph only looks like this if the currency pair remains
above the lower barrier and below the upper barrier. Otherwise, the
risk graph would be blank because you would have been knocked out of the option.
When you trade a double knock-out put option, one of the following five things will happen:
Maximum gain - The currency pair falls below the breakeven
price but remains above the lower barrier, keeping you in the option until it expires.
Minimised losses - The currency pair falls below the
strike price but remains above the breakeven price, keeping you unprofitably in the option until it expires.
Maximised losses - The currency pair rises above
the strike price but remains below the upper barrier, keeping you unprofitably in the option until it expires.
Maximised losses by being knocked out - The currency
pair rises up to the upper barrier and knocks you out of the vanilla put option before the option expires.
Maximised losses by being knocked out - The currency
pair falls down to the lower barrier and knocks you out of the vanilla put option before the option expires.
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One-Touch Options |
A one-touch option is an option that automatically pays a set
amount when the underlying currency pair trades at or beyond a
specified price level (barrier) before expiry. In other words,
you make money on a one-touch option if the currency pair touches a predetermined price.
Traders use one-touch options when they believe a currency pair
is going to reach a certain price before the option expires. Here's how
it works. If you choose a barrier above the current price of the currency
pair, you will be profitable with a one-touch option if the
currency pair rises up to, and touches, the barrier before the option
expires. If you choose a barrier below the current price of the
currency pair, you will be profitable with a one-touch option if
the currency pair falls down to, and touches, the barrier before the option expires.
For example, imagine you buy a one-touch option on the
EUR/USD with a barrier of 1.4200. If the EUR/USD currency
pair moves to touch that barrier at 1.4200, you will be profitable.
You can see two risk graphs for a one touch option below.
Looking at both of the risk graphs, you can see that you
only make a profit if the currency price touches a certain price either above or below the current price of the currency pair.
When you trade a one-touch option, one of the following two things will happen:
Maximum gain - The currency pair rises or falls to the barrier before the option expires.
Maximum loss - The currency pair does not rise or fall to the barrier before the option expires.
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No-Touch Options |
A no-touch option is an option that automatically pays a set
amount if the underlying currency pair never trades at or beyond
a specified price level (barrier) before expiry. In other words,
you make money on a no-touch option if the currency pair never touches a predetermined price.
Traders use no-touch options when they believe a currency pair
is not going to reach a certain price before the option expires. Here's
how it works. If you choose a barrier above the current price of the currency
pair, you will be profitable with a no-touch option if
the currency pair never rises up to, and touches, the barrier before the
option expires. If you choose a barrier below the current price of the currency
pair, you will be profitable with a no-touch option if the currency pair never falls down to, and touches, the barrier before the option expires.
For example, imagine you buy a no-touch option on the EUR/USD with a
barrier of 1.4200. If the EUR/USD currency pair never moves to touch that barrier at 1.4200, you will be profitable.
You can see two risk graphs for a no-touch option below. Looking at both
of the risk graphs, you can see that you only make a profit if the currency
price never touches a certain price either above or below the current price of the currency pair.
When you trade a no-touch option, one of the following two things will happen:
Maximum gain - The currency pair never rises or falls to the barrier before the option expires.
Maximum loss - The currency pair rises or falls to the barrier before the option expires.
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Double No-Touch Options |
A double no-touch option is an option that automatically pays a set amount
if the underlying currency pair never trades at or beyond either of two
specified price levels (barriers) before expiry. In other words, you make money
on a double no-touch option if the currency pair never touches either one of two predetermined prices.
Traders use double no-touch options when they believe a currency
pair is not going to reach either of two prices one above the current
price of the currency pair and one below before the option expires. Here's
how it works. You will be profitable with a double no-touch option if the
currency pair never rises up to, and touches, or falls down to, and touches,
either one of the barriers you have chosen before the option expires.
For example, imagine you buy a double no-touch option on the EUR/USD
with one barrier of 1.4200 and another barrier of 1.4000. If the
EUR/USD currency pair never moves up to touch the barrier at 1.4200, or down to touch the barrier at 1.4000, you will be profitable.
You can see the risk graph for a double no-touch option below.
Looking at the risk graph, you can see that you only make a
profit if the currency price never touches either one of two barriers either above or below the current price of the currency pair.
When you trade a double no-touch option, one of the following two things will happen:
Maximum gain - The currency pair never rises to the upper barrier or falls to the lower barrier before the option expires.
Maximum loss - The currency pair rises to the upper barrier or falls to the lower barrier before the option expires.
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