Average Price Put
What Is Average Price Put?
An average price call is a put option whose profit is determined by contrasting the strike price with the average price of the asset that happened during the option's term. Therefore, for a three-month average price call, the holder of the option would receive a positive payout in the event that the average closing price for the underlying asset traded over the strike price during the three-month term of the option.
Conversely, the profit for a traditional put option would be calculated by looking at the strike price to the price happening on the specific day when the option is exercised, or at the agreement's expiration in the event that it remains unexercised.
How Average Price Put Works
An average price put is an illustration of a put, an option that gives the owner of an asset the right to sell the underlying asset at a settled upon price by a certain date. Puts are called "puts" on the grounds that their owners have the option to put the asset available to be purchased. On the off chance that the average price of the underlying asset over a predetermined time span turns out to be greater than the strike price of the average price put, the payoff to the option buyer is zero. Otherwise, on the off chance that the average price of the underlying asset stays below the strike price of such a put, the payoff to the option buyer is positive and equivalents the difference between the strike price and the average price.
This is against a straight, or "vanilla" put, the value of which relies upon the price of the underlying asset anytime. Like all options, average price puts can be utilized for hedging or estimating, which relies upon whether there is an exposure to the underlying asset.
Average price puts are part of a more extensive category of derivative instruments known as average price options (APOs), which are in some cases likewise alluded to as average rate options (AROs). They are for the most part traded over-the-counter (OTC), however a few exchanges, for example, the Intercontinental Exchange (ICE), likewise trade them as listed contracts. These sorts of exchange-listed APOs are cash-settled and must be exercised on the expiration date, which is the last trading day of the month.
A few investors favor average price calls to traditional call options since they reduce the option's volatility. Since volatility improves the probability that an option holder will actually want to exercise the option during its term, this means that average price call options are generally more affordable than their traditional counterparts.
The supplement of an average price put is a average price call, in which the payoff is negative assuming the average price of the underlying asset is not exactly the strike price during the option's term.
Buyers of average price puts will generally have a bearish assessment of the underlying asset or security.
Illustration of Average Price Put
Think about an oil and gas producer in the U.S. that accepts crude oil prices are set to decline and therefore wants to hedge its exposure. Expect that this producer wishes to hedge 100,000 barrels of crude oil production for one month. Further, expect that crude oil is trading at $90 per barrel, and an average price put with a strike price of $90 terminating in one month can be purchased for $2 by the buyer.
Following one month, when the option is going to terminate on the off chance that the average price of crude oil is $85, the oil producer's gain would be $300,000 (i.e., the difference of $5 between the strike price and the average price less the option premium paid X 100,000 barrels).
Alternately, assuming that the average price of crude oil over the one-month period is $93, the option would terminate unexercised. In this case, the producer's loss on the hedging transaction would be equivalent to the cost of the option premium, or $200,000.
- Otherwise called Asian options, average price options are utilized when hedgers or examiners are keen on smoothing the effects of volatility and not depend on a single point of time for valuation.
- Average price puts are a modification of a traditional put option where the payoff relies upon the average price of the underlying asset over a certain period.
- This is against standard put options whose payoff relies upon the price of the underlying asset at a specific point in time - at exercise or expiry.