Vanilla option – what is it?

  In some articles and forums, you can come across the interesting term “vanilla option.” It is especially often contrasted with binary options or appears in phrases like “binary options originated from vanilla options.” But few people can actually explain what it really means. This gap in knowledge needs to be filled.

What Is a Vanilla Option?

  "Vanilla" is another name for classic options. In Russia, this term is rarely used, unlike in Europe and the USA. There, traders and brokers more often use the terms “standard” or “plain vanilla option.”
  This term refers to a type of security that gives its holder the right to buy or sell an asset. Such a contract has the following characteristics:
  1) The holder is not obligated to exercise the right. They can allow the contract to expire.
  2) The underlying asset can be a commodity, currency, or security. Based on this, options are divided into commodity, currency, and equity options.
  3) The strike price is determined before the contract is signed and does not change during its validity.
  4) The buyer of a vanilla option may exercise early expiration (if allowed), i.e., claim the rights stated in the contract before the expiration date.
  5) The expiration period can range from a few minutes to several months.
  6) Upon signing the contract, the seller is paid a premium equivalent to the financial risk assumed. This premium is also called the option price.
  Vanilla options are used either to make a profit or for hedging (protecting investments by making offsetting deals).
  Depending on the right granted—buying or selling—the options are classified as call or put.

Where Did the Term "Vanilla Option" Come From?

  Speaking about such a serious financial topic, one might expect a clear and fact-based explanation, ideally supported by data. However, those with a mathematical mindset will be disappointed: there is no historical background behind the name “vanilla option.”
  Once upon a time, investors and traders compared classic options to vanilla ice cream: familiar and widely available. Despite the variety of new flavors (i.e., option types), the classic still has plenty of loyal fans. When and by whom these contracts were dubbed “vanilla” is unknown.

Vanilla vs Exotic Options

  The opposite of vanilla options are non-standard or “exotic” options. These differ from classic options by a few features, but over time, they may transform into entirely new financial instruments. That’s what happened with binary options.
  At first, traders wanted to make vanilla options more exciting and added conditions to contracts—such as requiring the asset price to hit a certain barrier. These became known as “barrier options.” Their appeal grew because they offered higher profit potential, and the element of gambling attracted more users.
  Later, two barriers were introduced instead of one, creating a price range condition (e.g., greater than N but less than N+2). These options started resembling betting: instead of investing, the trader wagers whether the price will move within a certain range.
  At the same time, contracts began appearing that excluded the underlying asset altogether. Often, neither party was interested in the asset itself—only in the profit from price movement. Removing the asset simplified things for both buyer and seller.
  Combining settlement-only and barrier options created a new market direction. Now the trader doesn’t invest or buy anything—they simply bet whether the asset’s price will rise or fall. If the forecast is correct, they win the full amount; if not, they get nothing. These became known as binary options.
  In 2008, the Chicago Board Options Exchange officially adopted binary options. However, they gained widespread popularity not on exchanges, but online. By 2011, the number of online binary options brokers had surpassed a thousand.