What it is:
How it works (Example):
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 it Matters:
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.
More option-related definitions can be found at the InvestingAnswers Option Category Page.