Vanilla Options

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Written By
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William Berg
William contributes to several investment websites, leveraging his experience as a consultant for IPOs in the Nordic market and background providing localization for forex trading software. William has worked as a writer and fact-checker for a long row of financial publications.
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Edited By
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James Barra
James is an investment writer with a background in financial services. As a former management consultant, he has worked on major operational transformation programmes at prominent European banks. James authors, edits and fact-checks content for a series of investing websites.
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Jemma Grist
Jemma is a writer, editor and fact-checker focused on retail trading and investing. Jemma brings a unique perspective to the forex, stock, and cryptocurrency markets and works across several investment websites as a researcher and broker analyst.
Updated

Vanilla options (or plain vanilla options) give traders the right to buy or sell forex and other assets at a predetermined price in the future. This article covers definitions and types, including European style options, plus the strategies used to execute trades. We’ll also go through an example, before weighing up the pros and cons of trading vanilla options.

The Best Vanilla Options Brokers

Click a broker for details
  1. 1
    FOREX.com
    Active Trader Program With A 15% Reduction In Costs

    Ratings
    4.9 / 5
    4 / 5
    4.3 / 5
    4.6 / 5
    4.6 / 5
    4.3 / 5
    4.8 / 5
    4.5 / 5
    3.6 / 5
    3.8 / 5

    $100
    0.01 Lots
    1:50
    NFA, CFTC
    Forex, Stocks, Futures, Futures Options
    MT4, MT5, TradingView, eSignal, AutoChartist, TradingCentral
    Wire Transfer, Credit Card, Debit Card, Visa, Mastercard, Skrill, Neteller, ACH Transfer
    USD, EUR, GBP, CAD, AUD, JPY, CHF, PLN
  2. 2
    NinjaTrader

    Ratings
    4.3 / 5
    2.8 / 5
    2.9 / 5
    4.3 / 5
    4.5 / 5
    4 / 5
    4 / 5
    4 / 5
    3 / 5
    3.2 / 5

    $0
    0.01 Lots
    1:50
    NFA, CFTC
    Forex, Stocks, Options, Commodities, Futures, Crypto
    NinjaTrader Desktop, Web & Mobile, eSignal
    ACH Transfer, Debit Card, Wire Transfer, Cheque
    USD
  3. 3
    Interactive Brokers

    Ratings
    4.5 / 5
    3.5 / 5
    4.5 / 5
    4.3 / 5
    3.3 / 5
    3 / 5
    4.4 / 5
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    $0
    $100
    1:50
    FCA, SEC, FINRA, CFTC, CBI, CIRO, SFC, MAS, MNB, FINMA, AFM
    Stocks, Options, Futures, Forex, Funds, Bonds, ETFs, Mutual Funds, CFDs, Cryptocurrencies
    Trader Workstation (TWS), IBKR Desktop, GlobalTrader, Mobile, Client Portal, AlgoTrader, OmniTrader, eSignal, TradingCentral
    Cheque, ACH Transfer, Wire Transfer, Automated Customer Account Transfer Service, TransferWise, Debit Card
    USD, EUR, GBP, CAD, AUD, INR, JPY, SEK, NOK, DKK, CHF, AED, HUF
  4. 4
    eToro USA
    Invest $100 and get $10
    https://www.daytrading.com/ is not an affiliate and may be compensated if you access certain products or services offered by the MSB and/or the BD.

    Ratings
    4.3 / 5
    3 / 5
    3.9 / 5
    3.4 / 5
    4 / 5
    3 / 5
    4.3 / 5
    4.5 / 5
    4.3 / 5
    4 / 5

    $10
    $10
    SEC, FINRA
    Stocks, Options, ETFs, Crypto
    eToro Trading Platform & CopyTrader
    ACH Transfer, Debit Card, PayPal, Wire Transfer
    USD

What Are Vanilla Options?

A plain vanilla option is a financial instrument that allows holders to buy or sell an underlying asset, at a prearranged price within a given period. The holder owns the right to the transaction but does not necessarily have the obligation to exercise it. The broker acts as the pricer.

The definition of ‘plain vanilla’ comes from the idea that the option has no special features, meaning it is the simplest type of options contract.

Vanilla options are typically used by individual traders, companies, and institutional clients as a hedging tool, which we’ll explore later in this article.

There are different types of vanilla options that you can trade, for example, FX currency options, index options, swap and strip options, plus bond options.

You can find vanilla options trading at many UK-based and worldwide brokers, including IG, LCG, Avatrade, and easyMarkets.

Calls & Puts

Vanilla options consist of two types: call and put options. Call option holders have the right to buy the underlying asset at a predetermined price. This is known as the strike price. Put option holders have the right to sell the underlying asset at the same strike price and time frame.

The time frame is determined by the expiry date, which sets a time limit on the movement of the asset. The seller of the option is known as the writer, who is then obligated to buy or sell the asset, should the holder exercise their right to do so.

Characteristics & Strategies

Option Moneyness

Vanilla options are characterised by whether they are ‘in the money’ or not. An option is in the money if the strike price is higher than the market price of the underlier at the date of maturity. At this point, the option can be exercised by the owner.

There are several types of trading options that depend on being in the money. European style options need to be in the money at the expiry date in order to be exercised. The point at which an option moves into the money is when it gains intrinsic value. American style options, however, can be exercised if it is in the money on or before the date of maturity.

Premium

A premium is also paid by the owner to own the option and is based on the value of the underlier, the time left until expiry, and the volatility of the underlier. If any of these factors increase, the premium will subsequently increase. Options premiums can also be affected by interest rate changes and cash dividends.

Volatility

Options traders need to consider whether an asset’s current price is reasonable compared to its intrinsic value or future price. Some traders, however, prefer to predict the volatility, rather than the price. This volatility trading strategy assumes that more volatile assets have an increased chance of being in the money. This is why vanilla options are often quoted in terms of implied volatility.

Option Styles & Combinations

Vanilla options can also be combined with other types of options, which can create tailored outcomes. Exotic options, for example, are based on certain conditions that need to be met prior to execution and settlement. Exotic options are generally traded over the counter (OTC).

Other non-vanilla (exotic) options include:

Example

We’ve looked at what it means, but what does a plain vanilla options trade look like?

Stock ABC is currently trading at $15. A call option that expires in one week has a strike price of $16, and a cost (premium) of $0.18. Each option consists of 100 shares, therefore the cost of buying one would be $0.18 x 100 = $18.

Stock ABC will need to move above $16 to be in the money, but it will then need to move above $16.18 in order for the buyer to profit. If the value of stock ABC remains below $16, the writer keeps the premium. If the price rises above $16, the writer is obligated to sell the stock to the buyer at $16, even if it rises to $18.

You can find the relevant calculators and pricing valuation formulas within the trading platform of your chosen broker.

Pros & Cons Of Trading Vanilla Options

Pros

Reasons to trade vanilla options include:

Cons

Disadvantages of trading with vanilla options include:

Final Word

Vanilla options are a financial instrument that can be executed using a variety of trading strategies. This article has covered definitions, explained the different types of vanilla options, plus their benefits and drawbacks. Before deciding whether trading with vanilla options is right for you, you may want to consider alternative options instruments.

FAQ

What are vanilla options?

Vanilla options are a hedging strategy used by traders, where holders can buy or sell an underlying asset at a predetermined price in the future. Vanilla options consist of call (the right to buy) and put (the right to sell) options.

Where can I trade vanilla options?

There are plenty of FX brokers who offer options trading, including IG, eToro, Avatrade and easyMarkets.

What assets can I trade with vanilla options?

You can trade a variety of assets with vanilla options, including foreign exchange, stocks, bonds, and commodities.

Are vanilla options good for beginners?

Whilst vanilla options are fairly straightforward, they can be complex for anyone who hasn’t traded before. Beginners should always ensure they fully understand the risks involved with vanilla options trading.

FAQ