Vanilla Options (Call/Put): Traditional Options with Flexibility

Vanilla Options are the traditional, standardized form of options contract, giving the holder the right, but not the obligation, to buy or sell an underlying asset at a specified price (Strike Price) on or before a specified date (Expiry Date).

Key Characteristic:

• Variable Payout: Profit scales linearly with favorable price movement
• Fixed Risk: Loss capped at premium paid
• Right Not Obligation: Can choose not to exercise

Two Classic Contract Types:

• Call Option (Vanilla): Right to buy underlying asset at Strike Price - used when expecting market to rise
• Put Option (Vanilla): Right to sell underlying asset at Strike Price - used when expecting market to fall

Key Difference from Digital Options:

• Variable Profit: Scales with price movement (not fixed payout)
• Premium Cost: Pay upfront cost (not just stake)
• Breakeven Required: Must exceed strike + premium to profit

The linear profit scaling creates unique trading opportunities:

For Call Options:

• Profit increases as price rises above strike
• Unlimited upside potential
• Must exceed breakeven (Strike + Premium) to profit

For Put Options:

• Profit increases as price falls below strike
• High downside potential (limited by zero price)
• Must fall below breakeven (Strike - Premium) to profit

Strategic Implication: This contract type rewards traders who can predict large price movements and select optimal strike prices balancing probability with profit potential.

Vanilla Options work based on three key parameters: the Premium (Cost), the Strike Price, and the Exit Price.

Premium (Cost):

• Upfront Payment: Price you pay to open contract
• Maximum Loss: Represents your total risk
• Non-Refundable: Lost if option expires worthless

Strike Price (S):

• Predetermined Price: Transaction price if option exercised
• You Select: Choose based on strategy
• Affects Premium: Closer to current price = higher premium

Exit Price:

• Price at Expiry: Underlying asset price at expiry or exercise moment
• Determines Profit: Compared to strike price to calculate P&L

Call Option Profit:

• Option profitable if Exit Price > Strike Price
• Formula: Profit = (Exit Price - Strike Price) - Premium
• Example: Strike $1000, Premium $50, Exit $1080 = $30 profit

Put Option Profit:

• Option profitable if Exit Price < Strike Price
• Formula: Profit = (Strike Price - Exit Price) - Premium
• Example: Strike $1000, Premium $50, Exit $920 = $30 profit

Loss Scenario:

• If profit calculation is negative, loss capped at Premium
• Option expires worthless if price doesn't reach breakeven
• Entire premium lost even with correct directional prediction

Breakeven Points:

• Call Breakeven: Strike Price + Premium
• Put Breakeven: Strike Price - Premium

✅ Call Success

Exit price above breakeven = Variable Profit

❌ Call Failure

Exit price below breakeven = Premium Lost

Understanding Call Option Outcomes:

• Success: Exit price exceeds strike + premium (breakeven) = Profit scales with price increase
• Failure: Exit price below breakeven = Option expires worthless, lose premium
• Variable Profit: The further price rises above breakeven, the higher your profit

✅ Put Success

Exit price below breakeven = Variable Profit

❌ Put Failure

Exit price above breakeven = Premium Lost

Understanding Put Option Outcomes:

• Success: Exit price falls below strike - premium (breakeven) = Profit scales with price decrease
• Failure: Exit price above breakeven = Option expires worthless, lose premium
• Variable Profit: The further price falls below breakeven, the higher your profit

Strike Price Selection:

• In-The-Money (ITM): Strike favorable to current price - high premium, high probability
• At-The-Money (ATM): Strike equals current price - moderate premium, moderate probability
• Out-Of-The-Money (OTM): Strike unfavorable to current price - low premium, low probability

American Style Options:

• Can be exercised any time up to expiry date
• Provides maximum flexibility
• Can lock in profits early
• Most common on Deriv platform

European Style Options:

• Can only be exercised on expiry date
• Less flexibility
• Must wait for expiry
• Simpler settlement

Time Value:

• Options have intrinsic value (profit if exercised now)
• Plus time value (potential for further favorable movement)
• Time value decreases as expiry approaches (time decay)

Risk Characteristics:

• Fixed Risk: Limited to Premium paid for option
• Known Upfront: Risk determined at entry
• Total Loss Possible: Can lose entire premium if option expires worthless

Risk Management Considerations:

• Premium Selection: Higher premium = higher cost but higher probability
• Strike Distance: Closer strike = higher probability but higher cost
• Time Decay: Premium value decreases as expiry approaches
• Breakeven Awareness: Must exceed breakeven to profit

Unlimited Variable Rewards:

• Call Theoretically Unlimited: Scales linearly with price rise
• Put High Potential: Limited only by price reaching zero
• Linear Scaling: Every point of favorable movement adds profit
• Suitable For: Large directional move expectations

Strategic Advantages:

• Unlimited upside potential (Call)
• Profit scales with magnitude of move
• Early exercise option (American style)
• Time value can be captured by early selling

Statistical Reality:

• Must cross breakeven to profit
• Many options expire worthless
• Correct direction doesn't guarantee profit
• Premium recovery requires significant movement

Large Directional Move Trading:

• Major Events: Expect large, long-term directional move
• News Releases: Following major announcements
• Fundamental Shifts: Structural market changes
• Unlimited Profit: Linear scaling captures full movement

Market Conditions:

• Pre-major news events
• Fundamental shift expectations
• Long-term trend changes
• High-impact catalyst anticipation

Success Factors:

• Requires major move prediction
• Benefits from fundamental analysis
• Suitable for patient traders

Fixed Risk Directional Trading:

• Known Maximum Loss: Premium defines total risk upfront
• Large Potential Gains: Unlimited profit exposure
• Risk Control: Can't lose more than premium
• Position Sizing: Easy to calculate maximum loss

Market Conditions:

• Any directional conviction scenario
• When risk management priority
• Long-term directional bets
• Controlled risk exposure desired

Success Factors:

• Requires strike price selection skill
• Benefits from risk management discipline
• Suitable for risk-conscious traders

Strategy Overview: Identify confirmed long-term upward trend. Instead of choosing cheap, far-out-of-the-money strike (high risk), choose in-the-money or slightly out-of-the-money strike.

Execution Steps:

1. Identify confirmed long-term upward trend
2. Select Call option with ITM or slightly OTM strike
3. Accept higher premium cost
4. Trade higher probability of reaching breakeven
5. Trend continuation quickly generates profit

Why It Works:

• Higher premium but much higher probability
• Realistic strike price more likely to profit
• Trend continuation reaches breakeven quickly
• Balances cost with probability

Step 1: Select Contract Type

• Navigate to Trade → Options → Vanilla Options
• Or find under traditional options sections
• Select Vanilla Options contract type

Step 2: Select Asset and Direction

• Choose asset (e.g., Volatility 100 Index)
• Decide on Call (Up) or Put (Down)
• Confirm directional conviction

Step 3: Set Expiry Date

• Choose duration (e.g., 1 day, 1 week, 1 month)
• Longer duration = higher premium but more time for move
• Match duration to expected move timeframe

Step 4: Select Strike Price (S)

• Choose strike price from available options
• Platform automatically quotes Premium for each strike
• Balance premium cost with probability

Step 5: Execute

• Click "Buy" to pay premium and open position
• Premium deducted immediately
• Contract now active

Step 6: Manage Position

• Can sell option early (American style) to lock in profits
• Can hold until expiry for settlement
• Monitor price vs. breakeven continuously

Pre-Trade Planning:

• Calculate breakeven point
• Define profit targets
• Plan exit strategy
• Set maximum holding period

During Trade:

• Monitor price vs. strike price
• Track option value (premium changes)
• Watch time decay impact
• Prepare for early exit if profitable

Exit Strategies:

• Early Sell: Lock in profits before expiry
• Capture Time Value: Sell while time value remains
• Cut Losses: Sell to recover remaining premium value
• Hold to Expiry: For maximum directional exposure

Post-Trade Review:

• Analyze strike price effectiveness
• Review premium cost vs. profit
• Evaluate exit timing decisions
• Refine strike selection strategy

Common Mistake: Only buying cheapest (most out-of-the-money) options

Why It Happens:

• Attracted to low upfront cost
• Not understanding low probability
• Chasing high leverage without risk awareness

How to Avoid:

• Cheapest options have lowest probability of profit
• Balance low premium with realistic strike price
• Consider probability of reaching breakeven
• Higher premium often offers better risk/reward

Common Mistake: Holding options until last minute

Why It Happens:

• Not understanding time value erosion
• Waiting for maximum profit
• Ignoring time decay impact

How to Avoid:

• Option value (premium) decreases as expiry approaches
• Don't hold until last minute
• Sell early to capitalize on remaining time value
• Time decay accelerates near expiry

Key Differences:

• Profit Scaling: Linear variable vs. fixed vs. leveraged
• Cost Structure: Premium vs. stake vs. stake
• Settlement: Exercise right vs. cash settlement vs. automatic

Objective: Understand the breakeven point requirement for Vanilla Options.

Step-by-Step Challenge:

1. Switch to Demo Account and select a Synthetic Index

2. Select Vanilla Call Option:

   • Choose 1 week duration
   • Browse available strike prices

3. Choose Strike and Note Premium:

   • Select a strike price (e.g., Strike = $1000.00)
   • Platform quotes Premium (e.g., Premium = $50)
   • Note both values

4. Calculate Breakeven Point:

   • Formula: Breakeven = Strike + Premium
   • Example: $1000.00 + $50 = $1050.00
   • This is the price needed just to break even

5. Buy Option and Reflect:

   • Purchase the option
   • Monitor price movement
   • Understand that:
     • Price at $1020.00 = $50 loss (full premium lost)
     • Price at $1050.00 = $0 (breakeven)
     • Price at $1080.00 = $30 profit

Reflection: Even though you predicted correct upward direction, profit requires exceeding the breakeven point significantly.

Variation 1: Strike Price Comparison

• Buy three Call options with different strikes (ITM, ATM, OTM)
• Same duration and asset
• Compare premiums and probabilities
• Track which becomes profitable first

Variation 2: Time Decay Observation

• Buy Call option with 1-week expiry
• Check option value daily
• Observe time decay impact
• Understand when to sell early

Variation 3: Profit Scaling Analysis

• Buy Call option
• Track profit as price moves favorably
• Compare to Digital Option fixed payout
• Understand linear scaling advantage