Vanilla Option
Candlefocus EditorCall and put options are the two types of vanilla options. A call option provides its owner the right, but not the obligation, to buy an underlying asset at a predetermined strike price within a specified time frame. A put option, on the other hand, gives its owner the right, but not the obligation to sell the underlying asset at the predetermined strike price within the specified time frame. Both call and put options can be used outright or in combination with one another.
Vanilla options can also be combined with other types of options to create custom outcomes. For example, a bull spread is a combination of call options. It involves buying a call option at a certain strike price and selling a call option at a higher strike price. It’s designed to create a low-cost, directional traded that offers profit potential and limited risk. Furthermore, an investor can create covered calls, where the investor owns the underlying stock and writes a call at a predetermined strike price. This way the investor captures an extra income stream from the underlying option, regardless of the stock price subject to the callPremium.
In conclusion, vanilla options are versatile instruments that offer numerous ways for investors to customise their trades and options strategies to offset risk and maximise returns. Furthermore, by combining vanilla options with other types of options, investors can generate custom outcomes such as bull spreads, covered calls and straddle trades. By understanding and utilizing vanilla options, investors can greatly increase their potential success in the markets.