Traded Average Price Option (TAPO)
What Is a Traded Average Price Option (TAPO)?
A traded average price option (TAPO) is an option contract in which the financial backer's profit or loss depends on the difference between the strike price and the average price, and not exclusively on the price of the underlying asset at expiration.
First offered in 1987 by the Banker's Trust in Tokyo, TAPOs are otherwise called Asian options. While the principal TAPOs were for oil, the instrument currently predominantly trades in metals.
How a Traded Average Price Option (TAPO) Works
A traded average price option is a over-the-counter (OTC) product. Its payoff has a basis on the average price of the underlying asset over a predetermined time span. The determination of the average price is at contract creation. For instance, settlement values begin from the difference between the strike price and the average price of the underlying asset on dates picked over the life of the options contract.
Compared to standard options contracts, TAPOs have a lower premium due to their as often as possible short lifespan. The premium is likewise not as much as exchange-traded contracts due to the manner in which these specific contracts determine their value. Rather than a contract having a daily price, you are getting an average price all through a predetermined amount of days. Asian options have a higher risk, which reflects in their lower premiums.
Who Uses Traded Average Price Options?
TAPOs empower traders to oversee volatility risk and offer a cost-successful alternative to standard listed options. They are options contracts with a price that is determined by the price of the underlying asset during a period instead of a value determined at maturity. TAPOs cost not exactly customary options and safeguard investors from market volatility risk. Having an American execution, holders might exercise out of the blue during the life of the contract on the predetermined dates. Asian options fall under the category of exotic options, and their utilization gains favor with commodity providers.
Common purposes of Asian options include:
- A business that is stressed over the average exchange rate over a long period of time
- Whenever a price at a specific point in time could be inclined to control
- If the market for an underlying asset turns out to be profoundly unstable
- On the off chance that pricing becomes inadequate in view of thinly traded, low liquidity markets
Trading Exchanges for TAPOs
One exchange where TAPOs are commonly traded is the London Metal Exchange (LME), a prominent marketplace for futures in non-ferrous metals like aluminum, copper, lead, and zinc. These call and put options come in contract lengths going from one to 27 calendar months, and the month to month average settlement price determines their settlement price. TAPOs, traded options, and futures are totally utilized as hedging instruments.
Features
- Compared to standard options contracts, TAPOs have a lower premium due to their as often as possible short lifespan. The premium is likewise not as much as exchange-traded contracts due to the manner in which these specific contracts determine their value.
- In a Traded Average Price Option (TAPO), the profit or loss is the difference between the strike and the average price of the asset during the term.
- TAPOs empower traders to oversee volatility risk and offer a cost-viable alternative to standard listed options.
