There are different types of options and each has some unique characteristics. We have the regular ‘vanilla options’, and then there are others like binary options
In reality, there are other exotic options too but we will focus on these three types of options as they are the most traded. Options are preferred over other trading instruments due to their simplicity in trading and ease of getting started.
We will now describe each option type in detail so you can distinguish between their features. Knowing this will help you determine which one to trade. Ultimately, choosing your preferred option type boils down to your trading preference.
Let’s start with vanilla options.
Vanilla Options
These are also referred to as classic options as they offer traders no extra features or characteristics and hence the term ‘vanilla’. These are the simplest type of option and the first option type among the rest to be traded.
They are not customizable as others and hence, different option types were developed for specific needs and they are more complex than classic options.
Vanilla options give the trader the right to buy or sell an asset at a set price at a certain date. This set price is known as the strike price. The strike price is the price at which both the buyer and the seller agree to exchange the asset.
As a trader, you can buy or sell the underlying asset depending on the market movement of the asset. If you think its price will increase, you will buy the asset and if its price will decline in the near future, you will sell the asset.
To buy an asset, you need a call option and to sell an asset, you need a put option. Keep in mind that call and put options give you the right, not the obligation to buy or sell the underlying asset.
Note that you can either buy or sell these options. To buy an option, the buyer has to pay the seller an amount. This amount is known as the premium and is the only risk that is borne by the buyer. But the seller carries unlimited risk. The premium amount increases with time and volatility.
The payout in vanilla options is variable. It depends on the underlying price of the asset.
The buyer is known as the holder and the seller is also known as the writer. Every options contract has an expiration date. The latest date on which the option can be exercised is known as the expiration date.
Vanilla options are quite popular in the U.S. Here, the American style European style
Typically, vanilla options expire once a month.
These are the basics of Vanilla options. Let’s explore binary options now.
Wednesday, January 22, 2020