Vanilla options - what is this?

by Dwayne Buzzell Forex

Vanilla option is the web based trading platform. It provides trading and risk management with equity derivates. It includes market structure, best practice, and conventions. It can see option pricing, volatility and model calibration. It can be used trading strategies for buy side and sell side. Vanilla option is an option with standard features like strike price, expiration day and single underlying assets. The option is  effective at the current day exercise is payout the difference between the value underlying assets and the strike price. It is also known whether the option is call or put and time the options is sold. Options can be exercised any time as American style. It can be European style  when the option can be exercised only on an expiration day.  When trading platform opens it depends on your size screen. On the top left corner, you see trading pairs for spot option. On the top right and top center, we have option trading assets. It can see strike price, ask and bid price. Yellow colored prices indicate that the options are out of the money. On the bottom left, we have a window shows opening positions and pending orders. On the bottom right we have the tool called  the risk manager. On the top right, you can see your account summary including your account number, how much cash is in your account, excess cash, margin, margin % used and net liquid equity. We supposed over the next month EUR/USD is going to much higher but not so sure. We buy a call option. We set up option. By double-click, we can see a ticket window. It is simple to choose lot, a call option, expiry day and  investment amount.  The expiry date is can change if you like. The strike price it can change if you like. We set up the market order. We can choose limit and stop order. We click the buy and trade are done. As you can see here in the ticket window the open position window. If we go over  risk manager window we can see the same option I can see expiration and options status in the money out of the money. 

vanilla optionsVanilla options are developed and the building blocks on the options market. They can be traded one by one or combined into options strategies. There are put options and call options. A call option gives the right to buy but not the obligation to buy underlying asset. In this case forex pair at the given price and at the given point time.  A put option, on the other hand, gives the buy right but not the obligation to sell the underlying asset at the given rate and at the given point in time. Options trading is valuable. The valuable options are called premium. The costs of purchase an option is premium. The buyer of the option will pay the premium to the seller when the contract is entered. The risk of the buyer option is limited to the premium paid. The seller, however, has the obligation to enter transaction should the options be exercised. There are for the face on limited risk. For taking this risk the seller receives the premium for the option when the contract is entered considering the premium as the payment for taking the risk.

When you want to execute the trade in Vanilla option you need to know the following:

  1. The trade amount
  2. The underlying currency pair/type
  3. Put or Call?
  4. Strike Price
  5. Expiry how long the options should be valued.

The strike is the price which the holder of a call option can buy underlying forex pair or the holder of the put option  can sell  underlying forex pair at the expiry date. If the expiry date is one month, for example, it means from today options is valued at the date of expiry one month from today. Vanilla options provide volatility during the open trade. It can be an increase, decrease and unchanged. The sensitivity of an option depends on the spot price, interest rates, and implied volatility. We can use Greeks letter like delta and vega. Delta indicates an option sensibility to the exchange rate on the underlying forex pair. It changed during the lifetime of the option. As a result, you exposure changes underlying forex pair bringing an option will change accordingly. Vega indicates sensitivity changes by implied volatility underlying forex pair. It indicates how much the value of the option contract changes by when volatility changes by 1%.

The advantages edge of binary options over vanilla options is the same percentage return profit. Binary options have a fixed investment capital. Vanilla options have a flexible investment capital  based on many costs. They are the cost of time value, the cost of volatility and the cost of the delta. The cost of time value is the same cost for any expiry duration. The longer expiration time, the higher cost. Traders can select any expiration with the same capital. The longer expiration time, the higher capital requirement. The volatility is  different between the high and low price on any  time frame. It can be low and high volatility. The same cost for any market condition. The higher volatile market, the higher cost. It helps traders to make more profit return on market's top and bottom because that time has the most volatility. Delta is a correlation between the price of Vanilla options and price of the underlying asset. In the money, option has the highest correlation. And it has also highest premium. The most potential profit is out of the money option. It has the lowest premium and lowest correlation. The higher correlation(-1,1) the higher option premium. The higher strike price was selected the higher profit. The higher strike price was selected, the low correlation. The smaller correlation, the smaller option price change. Profit based on market value underlying asset, delta and volatile. It requires a higher cost for the same percentage profit return. Binary option has a fixed investment capital for any strike price, trading duration and market condition. Vanilla option has different premium for different strike price, trading duration and market condition.

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About Dwayne Buzzell Innovator   Forex

17 connections, 0 recommendations, 69 honor points.
Joined APSense since, July 1st, 2016, From Oakland, United States.

Created on Dec 31st 1969 18:00. Viewed 0 times.


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