If you live in the UK finding vanilla options to trade is a nightmare. The market is full of all these crazy binary option bets that are designed to consistently lose money. In fact a Google search of options now just brings up binary options. Vanilla options are regular call and put options which gives the buyer the right but not the obligation to buy or sell an asset.
Option trading allows for a trader to hedge their position in a specific market and reduce risk or a trader can build strategies in the market by writing an option or buying it. Here are some of the most important things you need to know about an option.
What Are Vanilla Options?
A vanilla options are financial instruments that give the holder the right, but not the obligation, to buy or sell an underlying asset at a predetermined price, within a given time period. A vanilla option is a normal call or put option that has standardized terms and no special or unusual features. It is generally traded on an exchange such as the Chicago Board Options Exchange.
Why Vanilla Options?
Vanilla Options are normally traded on regulated exchanges or offered by regulated brokers. Binary Options have been long declared a scam by the SEC and various other regulators. See SEC warning on Binary Options Here
A real opportunity is available in Vanilla Option trading to make money. Remember THE BIG SHORT? Those guys made money from trading Vanilla Options. Credit default swaps were a type of Vanilla Option against Mortgage bonds.
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Spreads on Vanilla Options tend to be slightly wider than those of the underlying cash market, the broker naturally has to be fairly compensated for assuming the risk of in some cases writing the Option or guaranteeing the writer. However this is not terribly important as implied volatility quickly negates the spread. This is normal for all Vanilla Options.
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