In the 50s of the last century, the formation of international financial markets took place, which was characterized by the introduction of a significant number of financial instruments. Over time, the variety of securities circulating on the world market began to increase rapidly and reached a high point in the 1990s. In addition to the traditional instruments of the stock market, derivative securities appeared. The purpose of their creation was to increase the attractiveness of the relevant securities for various investors and introduce hedging schemes with the help of new types of derivative securities. The latter could be useful for the risk management of companies.
One of the most effective tools of the financial market in developed countries is considered an option. These markets are quite successful. Investors appreciate the portfolio strategies, which is reflected in the large volume of trading operations and their enormous success. Success breeds a desire to invent new and new variants. In recent years, we have seen significant innovation in the number of instruments offered to investors.
Vanilla Options: Main Features
Most market participants single out the two largest groups of options: vanilla and exotic. The unique, unusual structure of the option is regarded as exotic. Meanwhile, the rate of vanilla options is very clear, and these assets can be easily sold due to their high liquidity. The main types of vanilla options are “call” and “put”:
- A call entitles its owner to buy a determined number of assets at a certain or strike rate, on or before a particular date. The owner has an opportunity, but not the obligation, to execute the option. They choose to exercise when the market value of the asset being purchased exceeds the exercise price.
- A put is a trading tool that gives its owner the right to sell a specified number of assets at a certain rate before or on the expiration date. While the income of the call asset holder grows as the value of the asset grows, the income of the put asset holder increases when its value falls. A put option will be executed only if the strike price exceeds the price of the basic asset.
According to the type of execution, options can be American or European:
- American type – a specific period is set during which the buyer can carry out the necessary manipulations with the asset.
- European type – all transactions are carried out on a clearly established date.
The type, the sale and purchase price, the amount of the contract, and the type of asset are discussed when concluding the contract. This is the standard variety, which is called the “vanilla option”, and they mean several options for implementing a number of trading strategies.
Binary and Vanilla Options: What Is the Difference?
A binary option has a specific feature – its value is either zero or one hundred percent (that is, it either brings a fixed amount of income, or it does not bring anything). In the case of a vanilla analog, there is no need to determine many options for trading each option separately – the profit is not fixed. There are many strategies for manipulating both binary and vanilla options – everyone can choose the most optimal and less risky solution.
Stable earnings depend exclusively on experience and knowledge, and you should not rely on intuition and luck in the case of vanilla trading. This type of contract is considered traditional and standard, which in the end gives the buyer or seller the right to perform stipulated transactions, at the same time, they have some characteristics and indicators, including volume of operation, direction, price, and object of trade.
Both trading varieties – binary and vanilla – differ in many ways. And both have their pros and cons. To sum up, Binary options are somewhat illegal, while vanilla alternatives are 100% legal and licensed. A vanilla option gives you real opportunities for real money, whereas binary options do not. Binary trading has unquoted instruments while real options have quoted instruments, and they are well regulated. It can be recognized that binary options trading is always riskier. That is why if you are not very confident in yourself, it is better to start from vanilla trading.