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Plain Vanilla Options: Summary
Plain Vanilla Options - Definition
Standardized exchange traded options without the advanced features found in exotic options.
Plain Vanilla Options - Introduction
You have heard of plain vanilla versions of alot of things, right? It simply means the plain old boring whatever it is talking about.
So what does Plain Vanilla mean in options trading? Plain vanilla options refers to options with no special features and are not exotic options.
Decades ago, all exchange traded options are plain vanilla options. Standardized stock options that all options traders trade and what most options traders still trade today. However, with the invention, standardization and popularization of exotic options such as binary options, there is now a need to define what constitutes "Plain Vanilla Options".
This tutorial shall explore what Plain Vanilla Options are in options trading and exactly what kind of options constitute plain vanilla options.
What Exactly are Plain Vanilla Options?
Some time ago, in order to answer what plain vanilla options are, all we have to say is that they are standardized options that you trade in an options exchange through your options broker. However, with the popularization of all kinds of exotic options which are also standardized and exchange traded, this definition has become inadequate. In fact, what was merely a slang term has now grown to become the official name for a form of option just like Barrier options and Asian options are names for some forms of exotic options.
The term "Plain Vanilla" is actually an English slang term meaning "Simple and Boring" and has actually evolved from vanilla ice-creams. As such "Plain Vanilla Options" actually mean simple and boring options with no advanced or complex features. In fact, any options that are not exotic options are plain vanilla options.
These days, exotic options are also traded alongside plain vanilla options on some assets such as forex. As such, it has become necessary to define exactly what plain vanilla options are.
You Are Most Likely Trading Plain Vanilla Options Right Now
If you are currently trading call options or put options on stocks, ETFs or indexes in the US market, you are most probably trading Plain Vanilla Options. Yes, plain vanilla options remain the most widely traded, understood and liquid options being traded in options trading. In fact, there are currently very few, if any, stocks that are listing exotic options alongside plain vanilla options. Whenever you open up an options chain of an optionable stock, you are looking at plain vanilla options.
Currently, all known options trading strategies are executed using plain vanilla options.
Characteristics of Plain Vanilla Options
Plain vanilla options have all of the following characteristics:
1. They are either American style options or European style options
2. They have multiple strike prices listed across multiple expiration months
3. They are either call options or put options, profiting only in a single direction
4. They can be exercised in order to trade the underlying asset at a specified strike price
5. They can be freely bought and sold anytime prior to expiration
Exotic options would have some but not all of these characteristics. Exotic options would have many more complex characteristics that allows them to profit in ways plain vanilla options cannot.
The Future of Plain Vanilla Options
The finance world is rapidly changing, growing and evolving, especially in the area of derivative instruments. More new, complex and creative options would be invented in the future but plain vanilla options would always be the mainstay of the options trading world and the main form of options being traded for decades more. Nothing can replace the simplicity, versatility and liquidity of plain vanilla options and it should continue to grow and strive in the options trading world for a long time to come.
Learn more about Options Trading Basics