Rancornews.com

Women business news

  • Cash Flow
    • Currency System
  • Economic Growth
    • Form of Payment
  • Financial Market
  • Contact
    • About Us
    • Privacy Policy
Search
  • Contact
  • Blog
  • Complaint
  • Advertise
© 2023 Rachornews.com | All Rights Reserved.
Reading: The Basic Concept of Vanilla Option
Share
Sign In
Notification Show More
Latest News
Investment Valuation Ratio Analysis
Financial Market
Endowment Factors and Economic Growth
Financial Market
Types of Tender Offers
Form of Payment
Controlled Foreign Corporation (CFC)
Currency System
Factors Affecting Net Investment
Company Cash Flow
Aa

Rancornews.com

Women business news

Aa
  • Cash Flow
  • Economic Growth
  • Financial Market
  • Contact
Search
  • Cash Flow
    • Currency System
  • Economic Growth
    • Form of Payment
  • Financial Market
  • Contact
    • About Us
    • Privacy Policy
Have an existing account? Sign In
Follow US
  • Contact
  • Blog
  • Complaint
  • Advertise
© 2022 Foxiz News Network. Ruby Design Company. All Rights Reserved.
Rancornews.com > Blog > Financial Market > The Basic Concept of Vanilla Option
Financial Market

The Basic Concept of Vanilla Option

admin
Last updated: 2023/05/06 at 6:21 AM
admin
Share
SHARE

Vanilla Option is a contract that gives the right, but not the obligation, to buy or sell the underlying asset at a certain price on a specified expiration date. The history of the use of Vanilla Option dates back to the 17th century in Europe, where the first stock exchanges opened and options trading became popular. ​​​​​​In this article, we will take a closer look at vanilla options, including the basic concept, influencing factors, benefits and risks and examples of their use.

The Basic Concept of Vanilla Option

Vanilla Option is a simple and common option built on top of an underlying asset which can be a stock, commodity, currency or index. There are two types of vanilla options, namely call options and put options. A call option gives the right to buy the underlying asset at a certain price on the expiration date, while a put option gives the right to sell the underlying asset at a certain price on the expiration date. The Vanilla Option mechanism involves buyers and sellers entering into contracts with certain conditions, such as the price of the underlying asset, expiration date, and the amount of the underlying asset being traded.

Factors influencing Vanilla Option

1. The price of the underlying asset is the main factor that influences the value of the Vanilla Option.
2. Market volatility is also very important, because the greater the market volatility, the greater the opportunity for profit and risk.
3. Expiration dates also affect the price of Vanilla Options, because the longer the time available, the greater the opportunity for profit and risk.
4. The interest rate also affects the value of the Vanilla Option, because the higher the interest rate, the more expensive it will be to purchase the option.

There are 3 reasons why Vanilla Options can be the right choice for forex traders:

* The risk is limited, but the profit can be unlimited. In accordance with the previous trading example, if it is in-the-money, the profit is calculated from the size of the price movement minus the premium fee. However, if out-of-the-money, the loss is only limited to premium fees. In addition, the risk of loss is known before you buy the option because it will be listed on the platform when you want to execute it.

* Complementary hedging strategy. The doubt that surrounds taking a trading position is nothing new. If you are trading on spot forex but are not too sure about the chances of successful positioning, then FX Vanilla Options can be a way out to break the deadlock. Let’s say you have a bullish bias for USD/JPY, but for some reason, you are still unsure about its potential. You have opened a buy order, but as a precaution you can buy a USD/JPY call option on FX Vanilla Options, to anticipate the possibility that the price will rise from its current position.

* More flexible than binary options. Vanilla Options gives you the freedom to determine your own strike price as the target price, while binary options tend to set the open price as the strike price. Determining the strike price can be part of a trading strategy, so the flexibility of FX Vanilla Options in this regard can certainly provide more opportunities for your trading success.

Advantages and Risks of using Vanilla Option

The advantage of using Vanilla Options is the ability to control the underlying asset at a lower cost than buying the underlying asset outright. In addition, options can be used to reduce risk in an investment portfolio. The risk in using Vanilla Option is the potential to lose the entire value of the option if the underlying asset does not move as expected. In addition, the maximum profit that can be obtained from options is limited.

Examples of Using Vanilla Option

An example of using a call option is when an investor buys a call option on XYZ stock at $50. If XYZ’s stock price increased to $60 on expiration date, the investor could exercise his right to buy the stock at $50, and sell it at the market price of $60, making a profit of $10 per share. An example of using a put option is when an investor buys a put option on ABC stock at $50. If ABC’s stock price drops to $40 on the expiration date, the investor can exercise his right to sell the stock at $50, and buy it back at the market price of $40, making a profit of $10 per share.

Conclusion

So, in summary we can conclude that Vanilla Option is a simple and common option that can be used to control the underlying assets at a lower cost and reduce the risk in the investment portfolio. Many consider that vanilla options are speculative trading transactions, because the instruments being traded are not given the right to buy and sell the underlying asset, only given the right to buy and sell assets with a set time limit. So the set liquidity tends not to be transparent and controlled by the broker. So it is vulnerable to the influence of the dealing desk.

You Might Also Like

Investment Valuation Ratio Analysis

Endowment Factors and Economic Growth

The difference between Autonomous Investment and Inducted Investment

Prospectus in Investment

Position Sizing in Forex Trading

Sign Up For Daily Newsletter

Be keep up! Get the latest breaking news delivered straight to your inbox.
[mc4wp_form]
By signing up, you agree to our Terms of Use and acknowledge the data practices in our Privacy Policy. You may unsubscribe at any time.
admin
Share this Article
Facebook Twitter Copy Link Print
Previous Article Factors that affect the Treynor Ratio
Next Article Bill of Materials: Definition, Process, and Management
Leave a comment

Leave a Reply Cancel reply

Your email address will not be published. Required fields are marked *

Weather
14 °C
London
overcast clouds
15° _ 13°
72%
3 km/h

Recent Posts

  • Difference Between Prepaid Debit Card and Regular Debit Card

    Difference Between Prepaid Debit Card and Regular Debit Card

    Debit cards have become a popular choice for conducting financial transactions in today’s digital era. In use, there are two types of debit cards that are commonly used, namely prepaid debit cards and regular debit cards. Both have differences in …
  • Factors that affect the Treynor Ratio

    Factors that affect the Treynor Ratio

    In the investment world, investors need a method or strategy that can assist them in making the right investment decisions. One method that is often used is the Treynor Ratio. Treynor Ratio is one method that can assist investors in …
  • Comparison of Limited Liability Partnership with Other Business Forms

    Comparison of Limited Liability Partnership with Other Business Forms

    Limited Liability Partnership or often abbreviated as LLP is a form of business that is increasingly popular among entrepreneurs. LLP combines the advantages of a partnership and a corporate structure so that partners can have better legal protection than a …

Stay Connected

248.1k Like
69.1k Follow
134k Pin
54.3k Follow

Latest News

Limited Partnership Formation Requirements
Financial Market
Strategies for Dealing with Fluctuations in Prime Lending Rates
Currency System
Capital Asset Pricing Model (CAPM)
Form of Payment

Interesting news!

  • CBOE Volatilty Index (VIX)

    CBOE Volatilty Index (VIX)

  • Prospectus in Investment

    Prospectus in Investment

//

Participate in building a strong business with all women around the world

Sign Up for Our Newsletter

Subscribe to our newsletter to get our newest articles instantly!

Follow US

© 2023 Rancornews.com | All Rights Reserved.

Removed from reading list

Undo
Welcome Back!

Sign in to your account

Lost your password?