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Vanilla options are a type of financial instrument that bestows a right upon the holder of the option. More precisely, Vanilla options give the holder of the option the right to purchase or sell an asset, at a specified price, within a specified time frame. At the same time, the holder of the option is not obligated to exercise the option. The expiration time for these options varies and can range from a single day to as long as a year. For most people, vanilla options are complicated and a mystery. Because of their seemingly complex structure, most people will prefer spot trading over options trading. Nevertheless, once a trader has tried options trading, they will embrace it wholeheartedly. This is because of the wide variety of options choices that are available and the ability to maintain control over the trades allow options traders to properly balance out their risks and rewards ratio.show more
In order to own an option, the trader must pay a price called the premium. If the role of the trader is as a buyer, then he will be the one who has to pay the price. However if the trader is a seller of the option, he will be the one receiving the premium. The amount of premium payable is determined by several factors such as the expiration date of the options, the current price of the principal asset and the strike price at which the option can be exercised. It should also be noted that the longer the option is dated, the higher will be the premium payable.
There are several reasons why options trading are preferable to other forms of trading. They include the following:
• Risk Management
While option trading is considered risky, it is still far safer than trading the spot markets. For the option trader, at risk is only the premium that he has paid for the option if he is the option buyer. For the seller of the option, his risk is also considerably less than being wrong with a spot trade. This is because the option seller gets to determine the strike price according to his risk appetite.
• Versatile Trading Style
With options trading, a trader can essentially cover any market view through a combination of long and short call/put options. For example, if the trader feels bearish but hesitates with the EUR/USD currency pair, he can purchase a put option to cover his position until his targeted expiration date. Hence in between, he longer has to feel anxious about his position.
Options are time sensitive instruments hence this make it even more critical that you use the correct chart when trading. Depending on the asset traded as well as the option expiration date, the ideal time frame for your options charts should be for the short term or medium term. Not only will you be able to filter out the market noise with a chart with the correct time frame, you will also be able to spot the trends forming in the market more clearly.