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The State of Vanilla Options Trading Around the World

August 13, 2019 by

Vanilla options (standard options) are often misrepresented in financial internet communities as they’re usually boiled in the same pot as binary options.

We all remember the time when binary options were gaining traction to a point where every single broker was adding them to their list of tradable assets. However, scammers managed to hijack the industry and ruin the name for pretty much forever.

Ever since then, multiple jurisdictions including the whole of the European Union have placed a permanent ban on binary options, preventing local traders from having their funds defrauded.

However, vanilla options are a completely different asset. Sure they share the name and some characteristics, but that doesn’t make them binary options. At this point, the regulators have indeed understood this difference, but for the traders themselves, tapping into this understanding, while having seen what binary options can do, has been relatively hard.

Therefore, we need to take a look at the state of vanilla options and how they are regarded in most of the world. At least the parts from where we were able to gather information on.

The EU

The European Securities and Markets Authority (ESMA) understands that vanilla options are regularly traded assets on multiple financial platforms and therefore does not have any issue in allowing them to operate within the country.

As already mentioned, the ESMA had placed a ban on binary options which more or less sent a message to traders that all options were to be avoided. The paper that has been published by the regulator explained the reasons for the ban that had been placed on binary options but makes room to clarify that vanilla options will remain within its regulatory framework as legitimate assets to trade with.

Forex brokerages across many jurisdictions allow their customers to utilize vanilla options on things like company shares, commodities, and even cryptocurrencies.

South Africa

South Africa was one of the countries that didn’t necessarily pay too much attention to binary options as this trading instrument wasn’t so popular in the country. In fact, when binary options were at peak popularity, most South African traders were getting into Forex due to an increasing number of successful South African Forex traders, which is a testimony and primary reason of the ever-growing number of Forex brokers in South Africa trying to capitalize on the popularity.

Now though, the region is starting to diversify its capital in other markets as well, especially equities and cryptocurrencies. Therefore, firms are starting to utilize vanilla options as a gateway from most Forex traders on similar platforms to switch over to the new derivatives.

There is no restriction placed on vanilla options, they are in fact being taught about by the country’s financial regulator, the FSCA.

The USA

When it comes to the United States is the world’s second country in terms of vanilla options volume traded. The only country they are falling behind on is the United Kingdom, which, as we all know, is the centerpiece of world finances.

Several traders had commented that vanilla options on company shares are the primary reasons why these assets are growing in popularity so much. The slowing economic growth is starting to affect some of the largest public corporations in the country alongside stable indices like the S&P500.

Having the ability to maximize profits on even the smallest number of outbreaks in a stock’s price is absolutely essential for US-based vanilla options traders to keep themselves profitable.

US regulators such as the CFTC and SEC have also never shown aversion towards vanilla options and are keeping them under a favorable regulatory framework right now.

China

At one point, China seemed to be a very favorable country for trading vanilla options. The exponential growth that most company shares went through truly managed to make several investors a small fortune enough to last them for multiple years.

However, when the craze got out of hand, meaning that when people started pouring capital in the market to a point where they didn’t even bother to research, the regulators were forced to send out warnings on the risks involved with options trading.

The warnings were sent out in March 2019, but it seems they may not have worked at all as the traction is as big as ever. Experts predict that this is due to China’s options market being rather small as of yet, therefore no real threat of a bubble currently exists.

However, it is expected that Chinese regulators can decide to place some restrictions on vanilla options should the market show any signs of overheating or overwhelmingly one-sided trade outcomes.

Let’s not forget that the main goal of the Chinese Communist Party is to somehow combat the still prevailing poverty in the country. Having most of their financial market investors lose money on options is not going to support their plans whatsoever.

Tools for vanilla option traders

The available tools vary between the company offering vanilla options for trading. However, generally you will find at least one tool that is universal among brokers, and that is the margin calculator to help traders determine when or why their position will be automatically closed. That is one of the most basic tools available in the trading industry. Let’s take a look at what brokers tend to allow their traders to use.

Option calculator

The option calculator helps traders to determine the pricing over the days of expiration and underlying price. It is usually done through in-depth analysis, trend studying, and the overall market sentiment for an indicated trading period.

Risk manager

The risk manager supports the traders to somehow manage their assets when the market becomes too volatile. For example, managing the portfolio is rather smooth when there are only a few moves in the price ranges, however, if traders are very active in selling/buying the asset the risk assessment becomes relevant during very volatile market movements.

Strategy optimizer

The strategy optimizer is like an automated calculator that detects around 10 most profitable trades for the next session and showcases them to the trader. Naturally, these are not 100% accurate.

Signals

Several brokerages also mentioned that they field a team of market experts that specialize in determining the market movement based on the financial developments within a country that a company is located in. Therefore they usually offer signals on what to put or call based on the assumptions of those experts, but some also give access to a dashboard of filtered important news.

Trading conditions with vanilla options

In terms of trading conditions, all we need to do is to look at the trends with several brokers, especially if they are of significant size for the market.

The key conditions here include leverage and, of course, the commissions.

Leverage

The maximum leverage for vanilla options is quite limited when comparing them to assets like Forex or CFD products. For example, the largest number in the USA is 1:20, while in the EU it is 1:10.

It is understandable as Forex rates are much more stable compared to the valuations of stock options, which most traders go for. Because of this predominant risk, companies tend to protect both themselves and traders from the unnecessary risk.

The highest leverage that can be found is usually offered in Asian countries where regulation is much lighter. For example, in China, it goes up to 1:50, which is why there is so much craze and volatility there.

Commission

In terms of commissions, it is safe to say that nearly 99% of brokers have them, and if they don’t they are quite likely to be a scam.

Commissions come in different shapes and sizes. Things like account maintenance, inactivity commissions, commissions on trades and so on, but the largest seen so far are definitely with the US-based brokers.

The largest we’ve seen is somewhere around $30 monthly fee due to inactivity, $20 fee for keeping the account open, and around $15 quarterly fee for maintenance and provided services. Other than that, there are usually commissions of around $10-$20 depending on the size of the put or call order.

However, due to the competitive nature of the market, brokers tend to not sway too far from each other’s commissions as to not lose traders immediately.

Margin call level

When it comes to margin, it is always important that the broker doesn’t just dish out margin calls left, right, and center. Due to the volatility of vanilla options on stocks and currencies, it is not uncommon to see an asset lose more than 50% of its initial value within a couple of days, therefore the broker needs to have a high margin level percentage.

The lowest available margin seen so far is, of course, 0% which is unlawful in the EU. The 0% can usually be found in under-regulated regions such as East Asia and Latin America-based brokers. With EU-based brokers, traders will get around 70% available margin before they get a margin call and with the US, it is usually around 30%.

Examples of companies

Bank-sanctioned

There are dozens of examples for brokers offering vanilla options, however not all of them are qualified enough to satisfy the needs of their traders, or some just restrict it to a point that only a set of high-caliber traders can apply as customers.

For example, if the brokerage is owned by a bank, it is highly likely that they have vanilla options only on one asset class rather than covering everything. It all usually comes down to regulations or the bank not having the capacity to support high-leveraged stock trades.

An example of bank-owned vanilla options brokers is Saxo Bank that has only FX options available with a few other assets tacked on. There are only four traditional pairs that traders can use, and despite the lack of diversity and access, quite a lot of customers opt for Saxo’s vanilla options offerings.

30 day at-the-money spreads at Saxo Bank

Saxo Group managed to use some of its banking experience to remove margin calculations to FX options which are quite rare to see in the options market, which is why they stand out.

However, when it comes to leverage, which is one of the most important part of vanilla options trading, the company falls short due to other benefits. For example, major currency pairs come with around 1:30 leverage with spreads sometimes as high as 10 pips.

Specialized trading companies

With specialized trading companies, it is a bit different. Companies that are options brokerages by nature and not subsidiaries of something else.

With these companies, traders usually get large leverage with a minimal spread, but commissions are always a big part.

One such example is easyMarkets that has a fully-fledged section for options trading.

Trading vanilla options with easyMarkets

The only reason why brokerage companies don’t really stand out with vanilla options is usually due to their high commissions and fees. But other than that, the most traditional vanilla options trades happen exactly here.

Side business

There are also options offerings from brokers that specialize in one thing (foreign exchange or stock market) but offer options trading as a side business. Usually, these platforms don’t feature vanilla options as exclusive assets, they are mostly included as parts of the overall platform.

One such example is AvaTrade, which has vanilla options as added value assets to their traders who can switch to them at any moment.

AvaTrade options conditions

These companies are also known for having above-average conditions for traders, such as high leverage and low spreads.

If you have any questions or comments about trading vanilla options on Forex, please share them using the commentary form below.

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