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A Brief Taxonomy of Derivatives and Exotic Options

Bond Measures and Option Hedge Parameters Exotic Options: Sub-classification

Glossary of Terms

Long Call Short Call

Long Put Short Put

Long Call Spread (Bull Spread) Short Call Spread (Bear Spread)

Long Put Spread (Bear Spread) Short Put Spread (Bull Spread)

Long Combo Short Combo

Long Straddle Short Straddle

Long Strangle Short Strangle

Long Guts Short Guts

Long Butterfly Spread Short Butterfly Spread

Long Condor Short Condor

Long Iron Butterfly Short Iron Butterfly

Long Iron Condor Short Iron Condor

Long Call Strip Short Call Strip

Long Put Strip Short Put Strip

Long Two by One Ratio Call Spread Short Two by One Ratio Call Spread

Long Two by One Ratio Put Spread Short Two by One Ratio Put Spread

Long Call Ladder Short Call Ladder

Long Put Ladder Short Put Ladder

Synthetic Long Underlying Asset Synthetic Short Underlying Asset

Long Call Spread versus Put Short Call Spread versus Put

Long Put Spread versus Call Short Put Spread versus Call

Long Straddle versus Call Short Straddle versus Call

Long Straddle versus Put Short Straddle versus Put

Long Volatility Trade Short Volatility Trade

Conversion/Reversal Long Box

Trades Involved for Packages (for Long Positions Only)

Long Put Short Call

Long Straddle Short Straddle

Long Strangle Costless Collar

Call Spread Ratio Call Spread

Put Spread Butterfly Spread

Barrier Option: Up-and-in Call Option Contingent Premium Option

Binary Cash-or-Nothing Call Binary Asset-or-Nothing Put and Call

Cap Floor

American Option – An option that can be exercised at any time during its life.

Amortizing Swap – A swap where the notional principal decreases in a predetermined way as time passes.

Asian Option – An option with a payoff dependent on the average price of the underlying asset during a specified period.

Asset-or-nothing Call (Put) Option – An option that provides a payoff equal to the asset price if the asset price is above (below) the strike price and zero otherwise.

Average Price Call (Put) Option – An option giving a payoff equal to the greater of zero and the amount by which the average price of the asset exceeds (is exceeded by) the strike price.

Average Strike Option – An option that provides a payoff dependent on the difference between the final asset price and the average asset price.

Barrier Option – An option whose payoff depends on whether the path of the underlying asset has reached a barrier (that is, a certain pre-determined level).

Basket Option – An option that provides a payoff dependent on the value of a portfolio of assets.

Bear Spread – A short position in a put option with strike price X1, combined with a long position in a put option with strike price X2 where X2 > X1. (A bear spread can also be created with call options.)

Bermudan Option – An option that can be exercised on specified dates during its life.

Binary Option – An option with a discontinuous payoff; for example, a cash-or-nothing option or an asset-or-nothing option.

Bond Option – An option where a bond is the underlying asset.

Bull Spread – A long position in a call option with strike price X1, combined with a short position in a call option with strike price X2 where X2 > X1. (A bull spread can also be created with put options.)

Butterfly Spread – A position that is created by taking a long position in a call with strike price X1, a long position in a call with strike price X3, and a short position in two calls with strike price X2, where X3 > X2 > X1 and X2 = (X1 + X3)/2. (A butterfly spread can also be created with put options.)

Calendar Spread – A position that is created by taking a long position in a call option that matures at one time and a short position in a similar call option that matures at a different time. (A calendar spread can also be created using put options.)

Call Option – An option to buy an asset at a certain price by a certain date.

Callable Bond – A bond containing provisions that allow the issuer to buy it back at a predetermined price at certain times during its life.

Caplet – One component of an interest-rate cap.

Cash-or-nothing Call (Put) Option – An option that provides a fixed pre-determined payoff if the final asset price is above (below) the strike price and zero otherwise.

Chooser Option – An option where the holder has the right to choose whether it is a call or a put at some point during its life. Also called an as-you-like-it option.

Collar – A short position in a put option with strike price X1, combined with a long position in a call option with strike price X2 where X2 > X1. (Both options are out-of-the-money.)

Commodity Swap – A swap where cash flows depend on the price of a commodity.

Compound Option – An option on an option.

Convertible Bond – A corporate bond that can be converted into a predetermined amount of the company’s equity at certain times during its life.

Convexity – A measure of the curvature in the relationship between bond prices and bond yields.

Credit Default Swap – An instrument that gives the holder the right to sell a bond for its face value in the event of a default by the issuer.

Currency Swap – A swap where interest and principal in one currency are exchanged for interest and principal in another currency.

Deferred Payment Option – An option where the price paid is deferred until the end of the option’s life. Also called a Boston option.

Deferred Swap – An agreement to enter into a swap at some time in the future. Also called a forward swap.

Differential Swap – A swap where a floating rate in one currency is exchanged for a floating rate in another currency and both rates are applied to the same principal.

Delta – The rate of change of the price of a derivative with the price of the underlying asset.

Down-and-in Option – An option that comes into existence when the price of the underlying asset declines to a prespecified level.

Down-and-out Option – An option that ceases to exist when the price of the underlying asset declines to a prespecified level.

Duration – A measure of the average life of a bond. It is also an approximation to the ratio of the proportional change in the bond price to the absolute change in its yield.

Equity Swap – A swap where the return on an equity portfolio is exchanged for either a fixed or a floating rate of interest.

Eta – The rate of change of the price of a spread option with the correlation between the underlying assets.

European Option – An option that can be exercised only at the end of its life.

Exchange Option – An option to exchange one asset for another.

Bonds:

Bond Option

Callable Bond

Convertible Bond

Extendable Bond

Interest-rate Cap

Interest-rate Collar

Interest-rate Floor

Puttable Bond

Treasury Bill

Treasury Bond

Zero-Coupon Bond

(Discount Bond)

Swaps:

Amortizing Swap

Commodity Swap

Credit Default Swap

Currency Swap

Deferred Swap

(Forward Swap)

Differential Swap

Equity Swap

Extendable Swap

Indexed Principal Swap

Interest-rate Swap

Puttable Swap

Step-up Swap

Swaption

Total Return Swap

Plain Vanilla Options and Their Combinations (Packages):

Call Option

Put Option

Bear Spread

Bull Spread

Butterfly Spread

Calendar Spread

Collar

Combo

Condor

Guts

Iron Butterfly

Iron Condor

Ladder

Straddle

Strangle

Strap

Strip

Two by one ratio Spread

Volatility Trade

Exotic Options: General

American Option

Asian Option

Barrier Option

Basket Option

Bermudan Option

Binary Option

Boston Option

(Deferred Payment Option)

Chooser Option

(As-you-like-it Option)

Compound Option

European Option

Forward Start Option

Lookback Option

Path-dependent Option

Quanto

Rainbow Option

Ratchet Option

(Cliquet Option)

Shout Option

Spread Option

Barrier Options

Down-and-in Call Option

Down-and-in Put Option

Down-and-out Call Option

Down-and-out Put Option

Up-and-in Call Option

Up-and-in Put Option

Up-and-out Call Option

Up-and-out Put Option

Binary Options

Asset-or-nothing Call

Asset-or-nothing Put

Cash-or-nothing Call

Cash-or-nothing Put

Path-dependent Options:

- Lookback Options

Fixed Strike

Floating Strike

- Asian Options:

Average Price Call Option

Average Price Put Option

Average Strike Call Option

Average Strike Put Option

Options Involving More Than One Asset:

- Basket Options

- Quantos

- Rainbow Options

Maximum Option

Minimum Option

Better-of Option

Worst-of Option

Two-asset Correlation Option

- Spread Options:

Margrabe Option

Energy Industry Examples

Crack Spread Option

Spark Spread Option

Extendable Bond (Swap) – A bond (swap) whose life can be extended at the option of the holder.

Flex Option – An option traded on an exchange with terms that are different from the standard options traded by the exchange.

Floorlet – One component of an interest-rate floor.

Forward Contract – A contract that obligates the holder to buy and sell an asset for a predetermined delivery price at a predetermined future time.

Forward Start Option – An option designed so that it will be at-the-money at some time in the future.

Futures Contract – A contract that obligates the holder to buy or sell an asset at a predetermined delivery price during a specified future time period. The contract is marked to market daily.

Gamma – The rate of change of delta with the price of the underlying asset.

Indexed Principal Swap – A swap where the principal declines over time. The reduction in the principal on a payment date depends on the level of interest rates. Also called an index amortizing swap.

Interest-rate Cap – An option that provides a payoff when a specified interest rate is above a certain level. The interest rate is a floating rate that is reset periodically.

Interest-rate Collar – A combination of an interest-rate cap and an interest-rate floor.

Interest-rate Floor – An option that provides a payoff when a specified interest rate is below a certain level. The interest rate is a floating rate that is reset periodically.

Interest-rate Swap – An exchange of a fixed rate of interest on a certain notional principal for a floating rate of interest on the same notional principal.

Lookback Option – An option whose payoff is dependent on the maximum or minimum of the asset price achieved during a certain period.

Modified Duration – A modification to the standard duration measure so that it more accurately describes the relationship between proportional changes in a bond price and absolute changes in its yield. The modification takes account of the compounding frequency with which the yield is quoted.

Package – A derivative that is a portfolio of standard calls and puts, possibly combined with a position in forward contracts and the asset itself.

Path-dependent Option – An option whose payoff depends on the whole path followed by the underlying variable – not just its final value.

Plain Vanilla – A term used to describe a standard deal.

Put Option – An option to sell an asset for a certain price by a certain date.

Puttable Bond – A bond where the holder has the right to sell it back to the issuer at certain predetermined times for a predetermined price.

Puttable Swap – A swap where one side has the right to terminate early.

Quanto – A derivative where the payoff is defined by variables associated with one currency but is paid in another currency.

Rainbow Option – An option whose payoff is dependent on two or more underlying variables.

Rho – The rate of change of the price of a derivative with the interest rate.

Shout Option – An option where the holder has the right to lock in a minimum value for the payoff at one time during its life.

Spread Option – An option where the payoff is dependent on the difference between two market variables.

Step-up Swap – A swap where the principal increases over time in a predetermined way.

Straddle – A long position in a call and a put with the same strike price.

Strangle – A long position in a call and a put with different strike prices.

Strap – A long position in two call options and one put option with the same strike price.

Strip – A long position in one call option and two put options with the same strike price.

Swap – An agreement to exchange cash flows in the future according to a prearranged formula.

Swaption – An option to enter into an interest rate swap where a specified fixed rate is exchanged for floating.

Theta – The rate of change of the price of a derivative with the passage of time.

Total Return Swap – A swap of the return on one portfolio of assets for the return on another portfolio of assets.

Treasury Bill – A short-term non-coupon-bearing instrument issued by the government to finance its debt.

Treasury Bond – A long-term coupon-bearing instrument issued by the government to finance its debt.

Up-and-in Option – An option that comes into existence when the price of the underlying asset increases to a prespecified level.

Up-and-out Option – An option that ceases to exist when the price of the underlying asset increases to a prespecified level.

Vega – The rate of change of the price of a derivative with volatility. Sometimes also referred to as lambda or kappa.

Warrant – An option issued by a company or a financial institution. Call warrants are frequently issued by companies on their own stock.

Wrangle – A long position in a ratio call spread and a ratio put spread.

Zero-Coupon Bond – A bond that provides no coupons. Also called a discount bond.

Bond Measures

Duration

Modified Duration

Convexity

Greeks

Delta

Gamma

Vega

(Kappa, Lambda)

Theta

Rho

Eta

Call Spread – Buy a call option (A); sell a call option at a higher strike (B).

Put Spread - Sell a put option (A); buy a put option at a higher strike (B).

Combo – Buy a put option (A); sell a call option at a higher strike (B).

Straddle – Buy a call option (A); buy a put option at the same strike (A).

Strangle – Buy a put option (A); buy a call option at a higher strike (B).

Guts – Buy a call option (A); buy a put option at a higher strike (B).

Butterfly Spread – Buy a put (or call) option (A); sell two put (or call) options at a higher strike (B); buy a put (or call) option at an even higher strike (C).

Condor – Buy a put (or call) option (A); sell a put (or call) option at two higher strikes (B, C); buy a put (or call) option an even higher strike (D).

Iron Butterfly – Buy a straddle, sell a strangle with strike prices above and below the strike price of the Straddle; that is, sell a put option (A); buy a put option and a call option at a higher strike (B); sell a call option at an even higher strike (C).

Iron Condor – Buy a strangle, sell a strangle with strike prices outside those of the bought strangle; that is, sell a put option (A); buy a put option at a higher strike (B); buy a call option at an even higher strike (C); sell a call option at an even higher strike (D).

Call Strip – Buy a call option (A); buy call options at higher strike prices – between 3 and 8 strikes may be used in total, with one call option purchased at each; all call options must be for the same expiry month.

Put Strip – Buy a put option (A); buy put options at lower strike prices – between 3 and 8 strikes may be used in total, with one put option purchased at each; all put options must be for the same expiry month.

Two by One Ratio Call Spread – Sell a call option (A); buy two call options at a higher strike (B).

Two by One Ratio Put Spread – Buy two put options (A); sell a put option at a higher strike (B).

Call Ladder – Buy a call option (A); sell a call option at a higher strike (B); sell a call option at an even higher strike (C).

Put Ladder – Sell a put option (A); sell a put option at a higher strike (B); buy a put option at an even higher strike (C).

Synthetic Underlying Asset – Buy a call option; sell a put option at the same strike (generally the at-the-money strike).

Call Spread vs Put – Buy a call option (B); sell a call option at a higher strike (C); sell a put option at any strike – the short put option will generally be at a lower strike than either call option (A).

Put Spread vs Call – Sell a put option (A); buy a put option at a higher strike (B); sell a call option at any strike – the short call option will generally be at a higher strike than either put option (C).

Straddle vs Call – Buy a call option (A); buy a put option at the same strike (A); sell a call option at any strike (B) – the short call option will generally be at a higher strike than the straddle.

Straddle vs Put – Buy a call option (B); buy a put option at the same strike (B); sell a put option at any strike (A) – the short put option will generally be at a lower strike than the straddle.

Volatility Trade – Buy put options and buy the underlying asset, or buy call options and sell the underlying asset to give a zero net delta; the position is dynamic in that as the underlying moves and the delta changes, additional futures must be bought or sold to maintain delta neutrality.

Conversion/Reversal – Conversion: sell a call option; buy a put option at the same strike; buy the underlying asset. Reversal: buy a call option; sell a put option at the same strike; sell the underlying asset.

Long Box – Buy a call option and sell a put option; buy a put option and sell a call option and at a higher strike; all four options should have the same expiry date.