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Options are one of the most important financial instruments in finance, as they provide a way to hedge an exposure and take speculative positions or bets on other specific financial instruments.
Vanilla options
There are two types of options, calls and puts. Call options give the right, but not the obligation, to buy another financial instrument at a predefined value (called strike price). Put options also give a right, but to sell the underlying financial instrument.
Options also differentiate by when they can be exercised. On this point of view, they can be European, American or Bermudan.
European options can be exercised only on a predefined date, called maturity, while American options can be exercised at any time. Bermudan options are something in the middle (in fact Bermuda is between Europe and the United States), they can be exercised on a predefined set of dates, say every 15th business day of the month, until they expire.
Asian options
This type of options is differentiated by the ones mentioned above by the fact that the strike price of the underlying is calculated using mathematical formulas. The most simple one is the average of the price of the underlying over the whole life of the option, but there can be several others, such as the square root, the second power and so on.
Exotic options
Exotic options are the ones that vary in the maturity dates, strike price and underlying. The most well known are barrier options and basket options.
Barrier options are usually based on specific ranges of the underlying price, for example a barrier can be 10% less than the underlying price at the emission date. When barriers are touched, the provisions established by the option seller apply, such as making the option worthless or anticipating the exercise.
Basket options are the ones that are based on a basket of underlying financial instruments, and they can contain provisions based on the price of these underlyings.
Crypto options
In the past years have been developed also options on cryptocurrencies, which can be in the form of all the examples listed above, but currently most of them are vanilla.
Options are usually negotiated Over The Counter, which means that it is an agreement between two parties not on exchanges and not monitored by any other party. This is very important to take into consideration, in fact it means that options carry a high counterparty risk, which is the risk that the counterparty will not be able to meet the obligation.
