Vanilla options, also known as "vanillas", are a great way to trade the markets with flexibility. They give you the right (but not the obligation) to buy or sell an asset at a set price before a specific date. Sounds complicated? Let's break it down step by step.
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How do vanilla options work?

Buying a vanilla option is like getting a backstage pass. You pay for the opportunity but decide whether to use it. If the experience is worth it (the market moves in your favour), you can use your pass and enjoy the benefits. If not, the worst-case scenario is you’re out the cost of the pass, but nothing more.
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Key terms to know

Before diving in, here are some key terms you should have in your back pocket:
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• ‍Expiration date: The deadline for your option. After this date, your pass (option) expires and can’t be used anymore.
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• ‍Stake amount: When you purchase a vanilla option, you pay a fee known as the premium or stake amount to the option seller. This premium serves as the cost of obtaining the rights that the option contract provides.
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• ‍A call option: It lets you buy an asset at the strike price before it expires, great if you think prices will go up.
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• A put option: It lets you sell an asset at the strike price before expiry, useful if you think prices will fall.
  With Deriv, these contracts are settled in payout instead of the actual asset.
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• Intrinsic value: The difference between the asset’s current price and the strike price.
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• Time value: It reflects how much time is left before expiry, more time typically means more value.
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• ‍Strike price: Also known as exercise price, this is a fundamental concept in options trading. It represents the predetermined price at which an option holder can buy (in the case of a call option) or sell (in the case of a put option) the underlying asset. The strike price is set when the option contract is formed and plays a crucial role in determining the option’s potential payout.

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Why trade vanilla options?

Traders love vanilla options because they offer flexibility and potential rewards. Here’s how you might use them:

• Expecting an asset’s price to rise? Buy a call option to lock in a lower purchase price. This means that even if the market price rises above your strike price, you maintain the right to buy at the agreed strike price.

• Thinking prices will drop? Buy a put option so you can sell at a higher price. This means that even if the market price falls below your strike price, you maintain the right to sell at the agreed strike price.

Of course, no trade is without risk. While vanilla options can be exciting, it’s always smart to manage your risk and trade responsibly.

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Get started with confidence

Vanilla options give you plenty of ways to trade, but like any financial tool, they come with risks. If you're new to options trading, why not start with a demo account on Deriv? You can also level up your skills with free courses on Deriv Academy.

Ready to dive in?

Log in to Deriv Academy with your existing Deriv account email and password. 

Practise with a demo account and trade responsibly.

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