Vanilla options are simply options with no special or unusual features. They may be either calls or puts, but not a combination of the two; more complex options strategies can be built out of vanilla options. Vanilla options give the holder the right, but not the obligation, to buy an asset at a predetermined price on a set date. They can be used in various financial markets, such as the stock, forex, and commodity markets.
Different types of option exist and are used in different markets. By far the most common are European options, which have a single expiry date. Much less common are American options, where they can be exercised at any time, and Asian options, which offer a ladder of specific dates up to a final expiry date where the option can be exercised. Normally when traders refer to options and option pricing they are talking about European options.
An option is vanilla if it has no additional characteristics and is just a lone call or put option. Exotic options can be formed either with specialised contracts, or by layering multiple call and put options to create a unique pay-out profile. These are known as exotic options, and even if they are made out of multiple vanilla options, do not qualify as vanilla.
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