What Is an Average Strike Option?

An average strike option is a type of option where the strike price depends on the average price of the underlying asset over a specified period of time. The payoff is the difference between the price of the underlying at expiry and the average price (strike). Average strike options are also known as 澳洲幸运5开奖号码历史查询:Asian options.

Understanding an Average Strike Option

With an average strike option, the 澳洲幸运5开奖号码历史查询:strike price sets at maturity, based on the average price of the 澳洲幸运5开奖号码历史查询:underlying. This is different than ♐an American or European option, where the strike price is known at the time of t🌞he initial purchase.

For an average strike call option to be 澳洲幸运5开奖号码历史查询:in the money (ITM), th🧸e underlying asset's price must be abo♕ve the average price (strike) at expiration. For a put option to be ITM, the underlying's price must be below the average price (strike) at expiration.

How the average is calculated must be specified in the 澳洲幸运5开奖号码历史查询:options contract. Usually, the average price is a 澳洲幸运5开奖号码历史查询:geometric or 澳洲幸运5开奖号码历史查询:arithmetic mean of the price of the underlying asset. The data points are taken at pre-determined intervals, called fixings, which are also specified in the options contract. Different averaging techniques, or the number of data points, will affect the average price. Therefore, it's important to understand how the averaging will be calculated.

Average strike options have lower volatility than standard American or 澳洲幸运5开奖号码历史查询:European options due to the averaging mechanism. This means they are typically cheaper than a comparable American or European option. They are used by traders who want exposure to an average price, or t♑hat have🍨 exposure to an underlying product, like a commodity for a period of time, and therefore want an average price option to cover that commodity for that period of time.

Uses for Average Strike Options

Average strike options are 澳洲幸运5开奖号码历史查询:exotic options, and help tradeꩵrs find solutions to proꦆblems that normal options may not.

A trader or business may use an average strike option 🌼if:

1. They want an average 澳洲幸运5开奖号码历史查询:exchange rate or price over time.
2. They feel the average price is less subject to short-term 澳洲幸运5开奖号码历史查询:manipulation around the expiry, which standard options may be exposed to.
3. They want to decrease the volatility of the option by using an average.
4. They want an average price for a thinly traded underlying market because pricing in the underlying market may be inefficient from day to day, but more stable when averaging the price over time.

Average Strike Option Example

On November 1st, a trader purchases a 90-day arithmetic average strike 澳洲幸运5开奖号码历史查询:call option on stock ABCDE. The stock currently trades at $50 and 💙averaging is based on the value of the stock after each 30-day period.

The stock price after 30, 60, and 90 days is $48, $53, and $56 and the arithmetic average price of the underlying is ($48 + $53 + $56) / 3 = $52.33. The profit is the price of the underlying at expiry less the average price (strike). Assume the stock is trading at $54.50 at expiry. $54.50 - $52.33 = $2.17 or $217 per 100 share contract.

If the underlying's price at expiry is below the average price (strike) then the call option is 澳洲幸运5开奖号码历史查询:out of the money (OTM). Conversely, if the price at expiry is above the average price (strike) then the call option is ITM. For a 澳洲幸运5开奖号码历史查询:put option, if the underlying is below the average price (strike) the option is ITM, and it is OTM if the underlying's 🉐price ꧟is above the average price (strike).

If the option is OTM, the loss is limited to the premium paid for the option.

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