Vanilla Option

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DEFINITION of 'Vanilla Option'

A financial instrument that gives the holder the right, but not the obligation, to buy or sell an underlying asset at a predetermined price, within a given time frame. 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.

BREAKING DOWN 'Vanilla Option'

Individual and institutional investors can take advantage of the versatility of options to design an investment that best meets their need to hedge or speculate on the price movement of an asset. If a vanilla option is not the right fit, they can explore exotic options such as barrier options, Asian options and digital options. Exotic options have more complex features and are generally traded over the counter.

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RELATED FAQS
  1. What's the difference between a regular option and an exotic option?

    Before learning about exotic options, you should have a fairly good understanding of regular options. Both types of options ... Read Full Answer >>
  2. How do futures contracts roll over?

    Traders roll over futures contracts to switch from the front month contract that is close to expiration to another contract ... Read Full Answer >>
  3. How does a forward contract differ from a call option?

    Forward contracts and call options are different financial instruments that allow two parties to purchase or sell assets ... Read Full Answer >>
  4. Why do companies enter into futures contracts?

    Different types of companies may enter into futures contracts for different purposes. The most common reason is to hedge ... Read Full Answer >>
  5. What does a futures contract cost?

    The value of a futures contract is derived from the cash value of the underlying asset. While a futures contract may have ... Read Full Answer >>
  6. What are the main risks associated with trading derivatives?

    The primary risks associated with trading derivatives are market, counterparty, liquidity and interconnection risks. Derivatives ... Read Full Answer >>

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