Himalaya Options
A Himalaya option is an equity option contract whose payoff is determined by the best performer of a number, or basket, of options over a period of time. Himalayan options are a popular variety of “mountain range” options, a line of exotic path-dependent options with the features of both basket and range options.
This tutorial will give you the full rundown on Himalaya options, answering all your questions on this exotic option, its benefits, and whether it can have an impact on your trading strategy.
Below we list the top-rated brokers that offer retail options trading in 2024.
What Are Himalaya Options?
Himalaya options are a variety of mountain range options, meaning the contract is based on the performance of a basket of underlying assets over a specific time range. Since mountain range options are more complex than vanilla option contracts, they are categorized as exotic options, and are usually tailor-made contracts available over the counter rather than on exchanges.
Importantly, because mountain range options combine several stocks in a single package, their combined volatility is often lower than the net volatility of an individual equity – a feature that helps keep prices down. As with many exotic options, Himalaya and other mountain range options are usually priced using the Monte Carlo simulation, a probability model that can be constructed in programmes like Excel.
Payoffs & Intervals
The unique characteristic of a Himalayan option lies in its approach to the payoff. Typically, mountain range options calculate the payoff based either on the average or the best performer among the basket of assets at predetermined time intervals. With Himalaya options, the time intervals, or observation dates, are equal to the number of stocks in the basket. At each observation date, a payoff is made according to the value of the best performing asset in the basket, which is then discarded from the list. This continues until only one final stock remains.
This payoff structure is attractive to investors since they can benefit from the maximum return of the best performing asset at each given observation date.
Himalaya Options Strategy
Since Himalaya options are normally only available over the counter and not on trading platforms, they are unlikely to have any real impact on the average day trader. Nonetheless, knowledge is the key for any successful trading strategy, and it is always worth learning more about varieties of exotic derivatives if they have any bearing on your investing system.
Traders don’t need to take a trading course to learn about Himalaya options and other exotic derivatives – a nearly unlimited wealth of information is available online. Some of the best instructional videos are found for free on finance channels on YouTube, and of course, websites like DayTrading.com provide everything you need to build a strong foundational knowledge. And, if you have any questions, you may be able to find a group on Reddit where you can get an answer from a professional. If you prefer not to do your research on the web, you can always put in a request at your local library for trading manuals.
Research & Learning
Once you’ve got the fundamentals down, it’s important to learn everything you can about the specific markets you intend to trade in. Since Himalaya options feature a basket of stocks, and not one single underlying asset, both the investor and the contract seller will have a larger dataset to review while researching the stocks in question and the option contract. This, and the Himalaya’s unique payoff model, makes pricing difficult.
One of the most important points to research when looking into Himalaya options is the specific stock market you intend to invest in, since this is the first step to identifying stocks to include in the basket, and it gives a general idea of the historical performance of that exchange. Companies based in Japan, Java and Jakarta will all perform differently according to different variables, for example, so take the time to hit up Google, research your target exchange and review the graphs.
Final Word On Trading Himalaya Options
Himalaya options are not widely available to retail investors on standard trading platforms. However, they share similarities with basket options while providing a unique pay-off approach. These products fall into the broader umbrella of exotic options, of which there are many different types. See our guide to options trading to find a product that aligns with your investment style and risk parameters.
FAQs
How Do Himalayan Options Work?
Himalaya options are exotic path-dependent options where the contract payoff is decided by the best performer of a number, or basket, of assets over a period. Their basket nature also means that the combined volatility is often lower, helping to keep prices down. They are typically tailor made contracts available over the counter.
What Is A Digital Reverse Himalaya Option?
A digital reverse Himalaya option contains a barrier feature. When a stock in the basket falls below the barrier level on the specified observation date, a coupon is paid out. The worst performing asset is also removed from the basket at the breach.
Where Are Himalaya Options Traded?
Since Himalaya options are a type of exotic option, they are almost always traded over the counter, and not on exchanges. So, Himalaya options tend to be used by institutional investors, who could be based in the UK, the USA, Europe, or anywhere else in the world.
Are Himalaya Options Equities?
The payoff of Himalaya options is based on the performance of a basket of assets, usually stocks in companies. The performance of the company in question is likely to be influenced by outside factors such as the price of commodities. So, for example, a Kuwait, Qatar or US-based oil company will tend to do better when oil prices are higher.
Can Retail Traders Use Himalaya Options?
Himalaya options trading volumes are primarily made up of large banks, hedge funds and other institutional investors. They are not typically supported by retail trading brokers. See our list of full options products and brokers that do offer retail trading products here.