What is Vanilla Option?

A new frontier for forex traders is the forex transaction involving forex options. Basically, this type of trading gives the investor the right to exercise an option, so its name. Many traders are turning to this type of trading due it its many advantages such as its flexibility and low up-front capital. There are several types of options and the most commonly used is the standard option. This type is more commonly called by traders as the "vanilla option". The term vanilla was used due to its lack of frills, its simplicity and plainness. If the word "vanilla" is placed before the forex option, the traders will take it as the standard type with only the basic contract in a forex option transaction is involved. The other type of option is the exotic option.

Vanilla options are further subdivided into two types, the "calls" and the "puts". A call option gives the option trader the right to buy a currency pair at a specified price and date. A put option gives the option trader the right to sell a currency pair also at a specific price and at a certain date. In both cases, the trader is under no obligation to effect the transaction at the agreed upon date and price if he does not want to. Likewise, for both types of options, the specified price is called the "strike price" and the specific date is the "expiration date". A trader who believes that the currency pair will move up or down may tend to exercise his right and buy or sell the pairs to gain profit. This basic transaction is what forex investors refer to as vanilla option.



Source by Timothy Stevens

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