Define “Exotic Options” and Explain Why Their Spreads Are Typically Wider than Vanilla Options

Exotic options are contracts with more complex features than standard "vanilla" options, such as non-standard payoffs, different exercise styles (e.g. Asian, Barrier), or path-dependent characteristics.

Their complexity makes them harder to price and hedge, resulting in fewer market makers willing to quote them. This lack of liquidity leads to significantly wider bid-ask spreads compared to vanilla options, directly translating to higher potential slippage for the trader.