Vanilla Options

What Are Vanilla Options?

Vanilla-type options are the classic options par excellence. They are the type of option that investors with experience in options will know or have worked with. The vanilla option is the right to buy or sell an asset at a specified price and term, hoping that this exercise price will be more favourable to us than the market price. In which case the product will be settled by differences (without physical delivery).

For example: If we buy the option to buy the share of company "x" at the price of EUR 10, and on the expiration day the share of "x" is worth 12, we will get the EUR 2 difference as a profit.

To obtain this right, we will pay a premium, which will be our maximum risk, while our earnings are unlimited. It is also possible to place ourselves on the selling side and enter the premium, but be careful, as our maximum loss will be unlimited.

What Types of Vanilla Options Are There?

Call

The right to buy an underlying asset at a specified price at a specified time in the future. The higher the market is on the day it expires, the greater the benefit for the option holder, as long as the price at maturity exceeds the option strike price. In the event that, on the expiration date, the market price is below the execution level, the holder will obtain a loss for the full value of the commission (premium).

Put

The right to sell an underlying asset at a specified price at a specified time in the future. The lower the market is on the day of its expiration, the greater the benefit for the option holder, as long as the price at expiration is below the option's exercise price (strike). In the event that, on the expiration date, the market price is above the strike price, the holder obtains a loss for the full value of the commission (premium).

Please note that this article is purely educational and this instrument is not a part of XTB’s offer.