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What is a Vanilla Option?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 18 October 2014
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Also known as a plain option or plain vanilla option, a vanilla option is a standard option that is structured with nothing outside the essentials. An option of this type may be structured as a put option or a call option. Due to the lack of any comprehensive features, this type of option is simple, straightforward, and easy for even new investors to understand.

The typical vanilla option will usually include a strike price, as well as an expiration date. The process that is used to pay a portion of the returns to investors is usually very simple, and includes no real provisions that are activated if unusual circumstances should take place. Essentially, the investor acquires the option, receives a return based on how the terms and conditions of the option are structured, and can look forward to the option reaching its expiration date without fail.

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One of the main advantages of a vanilla option is that fact that there is not much in the way of complicated provisions to consider throughout the life of the option. This makes an investment of this type particularly attractive to investors who are still learning how to trade effectively, and would rather deal with investments that are somewhat simplistic in nature. At the same time, seasoned investors often like the simple aspects of the vanilla option, because it is so easy to evaluate the option in a short period of time, and make a decision as to whether or not it is a good investment.

The non-exotic nature of the vanilla option is not without some potential issues. The lack of features, other than the basics, leaves open the possibility of some amount of confusion if unusual circumstances come into play in the market where the underlying securities associated with the option are traded. This can delay the implementation of decisive action, and conceivably lead to losses for investors. However, this possibility is a relatively small one, and would require severe shifts in market conditions to cause any real trouble.

It is a good idea to include at least a few options in the investment portfolio that are considered standard or vanilla. Since these options tend to include securities that are somewhat stable, they often carry a lower degree of volatility, and help create a sound base for the portfolio. This allows the investor to consider other types of investment options that carry a higher degree of risk while offering a higher return, without worry about causing a great deal of damage to the portfolio over the long term.

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