The word vanilla option comes from the English “vanilla option”, which is literally translated as “vanilla option”. This is because “vanilla” is a polysemous word, which means both “vanilla” and “ordinary, ordinary”. In fact, it means It is called “ordinary option”, but most people prefer to call it “vanilla option”. Generally speaking, in a standard options contract, after paying a premium, the buyer has the right to buy or sell the underlying asset at a specific price at a specific time in the future. It should be emphasized that although you have the right to buy or sell the subject matter, you are not obliged to do so. Therefore, you can choose to perform, or waive such rights. So, what are the benefits of such a mechanism design? How did vanilla options trading win over investors?

Basic Patterns of Vanilla Options Trading

for example:

Zhang San signed an agreement with the securities firm and paid an option fee of 2 yuan to purchase the corresponding stock trading rights. The two parties agreed that if the stock rose by more than 10 yuan, Zhang San had the right to buy the stock from the brokerage at a price of 10 yuan.

Assume that the stock rises to 20 yuan after 10 days, then Zhang San can choose to exercise his right and buy the stock at a price of 10 yuan. After that, he can sell the stock at a price of 20 yuan, earning a price difference of 10 yuan and losing the option purchase cost of 2 yuan. If the stock drops to 8 yuan, Zhang San cannot exercise his rights, has no transaction and no profit, and loses 2 yuan in option premiums.

From this point of view, once the stock rises beyond expectations, Zhang San’s profit margin is considerable, and even if it fails to rise beyond expectations, Zhang San will only lose a small part of the option premium. Please note that in this case, Zhang San’s fixed investment cost is only 2 yuan in option fees, but he may be able to leverage assets worth tens of yuan. If it is in a real case, if you add a few more zeros, you can easily understand the terrifying power of options, which can leverage large funds at a small cost. Some people can get rich overnight through it. Moreover, the risk of option trading is always controllable. The maximum amount you may lose is already determined when you buy it. Therefore, this is also an investment with controllable risk.

An Introduction to Common Terms in Vanilla Options Trading

Now that you understand the basics of how vanilla options trading works, you need to understand the common terms used in the industry.

Underlying stocks : Operating options and purchasing stocks is called holding “underlying stocks”. Correspondingly, you can also choose to only buy options and not buy stocks, that is, not hold “underlying stocks.”

Rollover : When an option is about to expire, and the holder still does not want to exercise it and wants to continue to hold the option, the holder can choose to sell the option that is about to expire and buy a valid option with the same underlying and same option price. A longer option is called a rollover.

Risk Exposure : The maximum loss that an option holder can suffer is called risk exposure. For example, if you buy 200 shares of a stock with an average price of 10 yuan and you are bullish, the maximum loss is if the stock drops to 0 and you lose all the shares. The risk exposure is 200*10=2,000 yuan. On the other hand, if you go short, the stock has unlimited upside potential, so the risk exposure is unlimited. And this is where options tools come into play. You can buy options and go short, so that even if the stock rises, you don’t have to exercise the option and only lose a certain amount of option premium.

Margin : The seller of an option must post a margin. Since the seller sells the option to the buyer and receives the buyer’s premium in exchange for the right, the seller must pay a deposit as a deposit. If the buyer exercises the option, the funds will come from the deposit. If the buyer does not exercise the option, the deposit will be returned to the seller.

Exchange options : Options that are publicly listed on an exchange and publicly traded by investors.

OTC options : Corresponding to on-market options, there are no specific standards, and leverage can be customized.

If you want to learn more, you can go to the professional vanilla options trading website to learn more about various vanilla options trading tools and trading models, as well as the latest industry trends.

Risk-free interest rate : The theoretical return on investment that can be obtained from an investment without risk. For example, the Treasury bond interest rate is a risk-free interest rate because the probability of Treasury bond default is extremely low.

Sharpe ratio : Sharpe ratio = (annualized return – risk-free interest rate) / annualized volatility of the portfolio. If the Sharpe ratio is greater than 1, it means that the fund’s return rate is greater than its risk; otherwise, the risk is greater than its return rate. The higher the Sharpe ratio, the better the fund performance; the lower the Sharpe ratio, the greater the fund risk.

Slippage : The price difference that may occur after the transaction order is approved and before it is executed is called slippage. Slippage often occurs when markets are volatile. Slippage can be positive or negative.

Basic operating strategies for vanilla options

1. Buy a call option: If the price of the underlying asset is expected to rise, then buy a call option. For example, if it is expected that the number of domestic tourists will double during the May Day period, you can purchase call options on tourism-related hotels, scenic spots, catering and other stocks. If the market moves as expected, you can earn profits by exercising the option or closing the position.

2. Buy a put option: If the price of the underlying asset is expected to fall, then buy a put option. For example, domestic new energy vehicle competition is fierce this year, and lithium battery prices have plummeted. However, the inventory of various car companies is too large, and there are no obvious signs of demand growth in the market. Once the price war starts, the profits of new energy car companies are expected to fall. Therefore, one can buy put options on related new energy stocks. If the market trend is as expected, you can also earn profits by exercising the option or closing the position.

3. Selling call options or put options: If you lack certain market experience, you can also choose the simplest method of selling options directly to obtain profits.

Vanilla Options Trading Platform

For novices, it is more recommended to buy and sell vanilla options through a compliant brokerage or trading platform, that is, buying them on the market, which has lower risks. Try to choose a trading platform that provides more trading tools, supports real-time data updates, and mobile applications to facilitate you to track transactions at any time. If you are willing to take greater risks for higher returns, you can also choose OTC trading, but this must be done after you have a certain understanding of the industry. After all, there may be regulatory loopholes in OTC trading, and the risk of encountering a fraud team is not ruled out, which may cause you to lose all your funds. Therefore, be cautious when entering.

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