The Vanilla option style is a category of options which includes only those with the most standard components. A plain vanilla option has an expiration date and straightforward strike price. American-style options and European-style options are both categorized as plain vanilla options. opposite of exotic option.
The vanilla option is the most traded and most common option. The two terms call option and put option are used in this option style. Anything that is not exotic falls under the vanilla option.
The term vanilla was used due to its lack of frills, its simplicity and plainness. If the word “vanilla” is placed before the forex option, the traders will take it as the standard type with only the basic contract in a forex option transaction is involved. The other type of option is the exotic option.
Vanilla options are further subdivided into two types, the “calls” and the “puts”. A call option gives the option trader the right to buy a currency pair at a specified price and date. A put option gives the option trader the right to sell a currency pair also at a specific price and at a certain date. In both cases, the trader is under no obligation to effect the transaction at the agreed upon date and price if he does not want to. Likewise, for both types of options, the specified price is called the “strike price” and the specific date is the “expiration date”. A trader who believes that the currency pair will move up or down may tend to exercise his right and buy or sell the pairs to gain profit. This basic transaction is what forex investors refer to as vanilla option.
A plain vanilla option is your plain run-of-the-mill option, with your standard expiry and strike price. It is a normal option with no special or unusual features.
For example, a plain vanilla option is the standard type of option, one with a simple expiration date and strike price and no additional features. With an exotic option, such as a knock-in option, an additional contingency is added so that the option only becomes active once the underlying stock hits a set price point.