Intro to Day Trading with Vanilla Options
Increased volatility in the financial markets is creating plenty of trading opportunities for retail traders and with so many different trading instruments now available, they can take advantage of different market conditions with competitive trading costs. Alongside the traditional assets that most of the traders use daily, vanilla options represent another great way to trade a multitude of underlying assets, especially when prices have a clear directional bias.ns
What are vanilla options?
A vanilla option represents a financial instrument giving the holder the right, but not necessarily the obligation, to buy or sell the underlying asset at a predefined price and within a given period. Basically, it is a call or put option with no out-of-the-ordinary features.
These instruments are available for both retail and institutional players, via options trading platforms developed by large brokerage houses. People are using vanilla options to speculate on the price movements of an asset or to hedge existing exposure against unexpected market moves.
Types of vanilla options
Traders can choose from two different types of vanilla options:
- Call options
- Put options.
Call options provide the right, but not the obligation, to buy the underlying instrument at the strike price (the price expected to be reached or surpassed by the time of expiry). A put owner, on the other hand, expects the price to go down and could sell the underlying options at the strike price.
It is important to note that vanilla options can be both bought or sold. An option seller is called a writer and writing an option creates an obligation to buy/sell the instrument, in case it is exercised by its owner.
The expiry date is another aspect to consider, given the price of the underlying assets needs to have a directional bias, in order to be successful (the asset price needs to rise for call buyers, or drop for put buyers).
Features of vanilla options
Each vanilla option has a strike price and based on it, the option can be deemed “in the money” (if the strike price is better than the market price at the expiration date) or “out of money” in the opposite scenario. The value of an option increases in value as the underlying asset moves in the right direction (up for calls and down for puts), which is why traders say that the option “moves in the money”.
Vanilla options for day-trading
Due to their lower price and availability at several large brokerage houses, vanilla options represent reliable trading instruments. Traders can use them even for day-trading when markets are volatile and have a clear directional bias. That is why the option can moveֶ within the span of a day. Also, when markets are choppy and daily ranges are small, traders can write options, expecting they won’t move towards the strike price before the expiration.
In 2020, retail traders had been increasingly tradingֶ options, with most of the analytics data companies showing record-breaking volumes. There are no reasons to be concerned about regulation, considering vanilla options are regulated instruments, available on large exchanges and options trading platforms.
