What is a Vanilla Option?
A vanilla option refers to a normal option with no special features, terms, or conditions.
How Does a Vanilla Option Work?
Options come in a variety of 'flavors.' A plain vanilla option offers the right to purchase or sell an underlying security by a certain date at a set strike price. In comparison to other option structures, vanilla options are not fancy or complicated. Such options may be well-known in the markets, and easy to trade.
Increasingly, however, the term 'vanilla option' is a relative measure of complexity, especially when investors are considering various options and structures.
Why Does a Vanilla Option Matter?
Option structures may be complex. However, in options trading, sometimes, simple option structures may be warranted. It is important to note that vanilla options do not necessarily indicate lower performance or opportunity.
If you'd like to read more in-depth information about options, check out these definitions:
Call Option -- Option to purchase the underlying asset.
Put Option -- Option to sell the underlying asset.
Options Contract -- The agreement between the writer and the buyer.
Expiration Date -- The last day an options contract can be exercised.
Strike Price -- The pre-determined price the underlying asset can be bought/sold for.
Intrinsic Value -- The current value of the option's underlying asset.
Time Value -- The additional amount that traders are willing to pay for an option.
American Option -- Option that can be exercised any time before the expiration date.
European Option -- Option that can be exercised only on the expiration date.
Exotic Option -- Any option with a complex structure or payoff calculation.