How do vanilla options work?
Call/Put
Call option
You will receive a payout at the contract's expiry if the final price is higher than the strike price (which is determined at the beginning of the contract period). If the final price is at or below the strike price, you will lose your initial stake (premium).
Your net profit will depend on how much the final price is above the predetermined strike price, with the maximum potential gains growing if the price of the underlying asset rises significantly. Your losses are limited to the initial stake required to purchase the call option.
Put option
You will receive a payout at the contract's expiry if the final price is lower than the strike price (which is determined at the beginning of the contract period). If the final price is at or above the strike price, you will lose your initial stake (premium).
Your net profit will depend on how much the final price is below the predetermined strike price, with the maximum potential gains growing if the price of the underlying asset falls significantly. Your losses are limited to the initial stake required to purchase the put option.
Why traders choose vanilla options
In addition to their simplicity to understand, the main reason traders choose to trade vanilla options is because they offer potentially high profit as they do not have a fixed payout, while losses are strictly limited to the initial stake amount.
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