Tuesday, February 25th, 2020

Trading Asian Style Stock Options


Not much used in the USA, trading Asian style stock options, offers a unique approach to averaging risk and reward in stock options trading. An Asian style option is unique in that the payment for the buyer, should he or she choose to execute the contract, is determined by the average price of the underlying stock over an agreed upon period of time. This approach reduces the potential for profit in buying options and also, to a degree, reduces the potential for loss for the seller. This approach differs from American style stock options and European style stock options in that each of the later styles allows for payment based on the price of the underlying at the time of execution. In trading American style options this can be any time during the contract period and in trading European style options this is the price at the end of the contract period. Like both European style and American style options, the trader, if he is trading in an exchange, can usually exit the contract, with profit or loss, by simply executing the opposite trade on the underlying stock with the same expiration date. Asian options were first introduced in Tokyo in the 1980’s. A useful aspect of trading Asian style stock options is when companies reimburse their employees with stock options.

Trading Asian Style Stock Options and Stock Options for Employees

Asian options are also referred to as “average value options.” An advantage of trading Asian style stock options is that they are said to reduce the risk of market manipulation just before they mature as a rise in the price on the last day of the options contract will only slightly raise the value of the payoff. Because the averaging aspect of this kind of options contract tends to reduce volatility, Asian style options are commonly cheaper than American or European style options. This can also be a decided advantage for companies that need to expense employee stock options.

Are There Advantages to Trading Asian Style Stock Options?

Because Asian style options are less expensive the cost of trading them is less prohibitive. To the extent that a trader engages in a profitable options trade, he may be less afraid of staying in the trade when the value of the contract peaks, as a sudden fall in value will not drastically affect the contract price. Those trading Asian style stock options will always be thinking of the average value of the underlying over the pre-determined time period and not of the value at any given point during the day. Likewise, the seller of such a contract may be less concerned that he will need to sell in the case of a call or buy in the case of put at a uniquely high price due to a momentary market fluctuation. As with all options trading it is important to follow through with both fundamental and technical analysis of the underlying in order to increase the odds of a profitable trade.

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