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.
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.
This content has been created by XTB S.A. This service is provided by XTB S.A., with its registered office in Warsaw, at Prosta 67, 00-838 Warsaw, Poland, entered in the register of entrepreneurs of the National Court Register (Krajowy Rejestr Sądowy) conducted by District Court for the Capital City of Warsaw, XII Commercial Division of the National Court Register under KRS number 0000217580, REGON number 015803782 and Tax Identification Number (NIP) 527-24-43-955, with the fully paid up share capital in the amount of PLN 5.869.181,75. XTB S.A. conducts brokerage activities on the basis of the license granted by Polish Securities and Exchange Commission on 8th November 2005 No. DDM-M-4021-57-1/2005 and is supervised by Polish Supervision Authority.
