How to trade vanilla options
Updated Apr 17, What is a Vanilla Option A vanilla option is a financial instrument that gives the holder the right, but not the obligation, to buy or sell an underlying asset at a predetermined price within a given timeframe.
In other words, vanilla options trading is plain puts and calls. A call is the right to buy a specific amount of the currency at a named strike price on or before a specific date, and a put is the right to sell a specific amount of the currency at a named strike price on or before a specific date. In Forex, options can be exchange-traded in futures or over-the-counter in retail spot Forex. Vanilla options can be traded in their own right as a directional bet or as a hedge against an existing position.
Exotic options have more complex features and are generally traded over the counter. Tthey can be combined into complex structures to reduce the net cost or increase leverage.
Vanilla Options – Easier Than You Think!
How to trade vanilla options and Puts There are two types of vanilla options: calls and puts. The owner of a call has the right, but not the obligation, to buy the underlying instrument at the strike price.
Binary options on androd owner of a put has the right, but not the obligation, to sell the instrument at the strike price. Shorting or writing an option creates an obligation to buy or sell the instrument if the option is exercised by its owner.
Plain Vanilla Options
Calls and puts both have an expiry date. This puts a time limit on how long the underlying asset has to move.
The most the option buyer can lose is the amount they paid for the option. The profit potential is unlimited and depends on how far the underlying moves above the strike price.
Vanilla Option Features Every option has a strike price. The premium is the price paid to own the option. The premium is based on how close the strike is to the price of the underlying in the money, out of the money, or at the moneythe volatility of the underlying asset, and the time until expiration.
Higher volatility and a longer maturity increase the premium. They can take an offsetting position at any time to close the options trade and realize their profit or loss on the option. Key Takeaways Vanilla options are financial instruments that enable purchase or sale of an underlying asset at a pre-determined strike price inside a defined timeframe. Call and put options, which give their owners the right, but not the obligation to buy or sell an underlying asset, comprise vanilla options.
Trading Forex via Vanilla Options
Vanilla options can be combined with exotic and binary options to create custom outcomes. Exotic and Binary Options Two other types of options can be combined with vanilla options to create tailored outcomes. The first type are exotic options, which have conditions or calculations attached to their execution.
For example, barrier options include a level that, if reached, causes the option to begin to exist or cease to exist. Digital options pay the owner if the underlying is above or below a specific price level.
An Asian option's payoff depends on the average traded price of the underlying instrument during the life of the option. The second type of options which can be combined with vanilla options are binary options. The outcome of such options is typically restricted to just two possible results, meaning that the payouts are also restricted.
They are typically used to speculate on price movements of an asset. Compare Accounts.