why trade exotic options 
exotic options have unique underlying conditions that make them a good fit for high level active portfolio management and situation specific solutions complex pricing of these derivatives may give rise to arbitrage which can provide great opportunities for sophisticated quantitative investors arbitrage is the simultaneous purchase and sale of an asset to exploit the price differences of financial instruments in many cases an exotic option can be purchased for a smaller premium than a comparable vanilla option the lower costs are often due to the additional features that increase the chances of the option expiring worthless however there are exotic style options that are more expensive than their traditional counterparts such as for example chooser options here the choice increases the chances of the option closing itm although the chooser may be more expensive than a single vanilla option it could be cheaper than buying both a vanilla call and put if a big move is expected but the trader is unsure of the direction exotic options may also be suitable for companies that need to hedge up to or down to specific price levels in the underlying asset hedging involves placing an offsetting position or investment to offset adverse price movements in a security or portfolio for example barrier options can be an effective hedging tool because they come into existence or go out of existence at specific barrier price levels exotic option examplesay an investor owns equity shares in apple inc the investor purchased the stock at 150 per share and wants to protect the position in case the stock s price falls the investor buys a bermuda style put option that expires in three months with a strike price of 150 the option premium costs 2 or 200 since one option contract equals 100 shares the option protects the stock position from a decrease in price below 150 for the next three months however this bermuda option has an exotic feature allowing the investor to exercise early on the first of each month until expiry the stock price declines to 100 in month one and by the first day of the option s second month the investor exercises the put option the investor sells the shares of apple at 100 per share however the strike price of 150 for the put option pays the investor a 50 gain the investor has exited the overall position including the stock position and put option for 150 minus the 2 premium paid for the put if apple s stock price rose after the option was exercised in month two say to 200 by the option s expiration date the investor would have missed out on the profits by selling the position in month two although exotic options provide flexibility and customization they don t guarantee that the investor s choices and decisions of which strike price expiration date or whether to exercise early or not will be correct or profitable investopedia does not provide tax investment or financial services and advice the information is presented without consideration of the investment objectives risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors investing involves risk including the possible loss of principal 