Asian Option Beginner’s Guide to Trading
Trading provides several investment alternatives, including Asian options. This article introduces this option to traders new to trading.
An Asian Option?
Asian options are financial derivatives based on the average price of an underlying asset over time. This separates it from European and American options, which only rely on the asset’s expiry price.
The average price, or arithmetic mean, is computed across the option’s lifetime or a defined subset. Asian options are less affected by short-term market volatility due to their pricing methodology.
Asian Options: How Do They Work?
Like other options, an Asian option gives the holder the right, but not the responsibility, to purchase (call option) or sell (put option) an underlying asset at the strike price within a certain period. The payout system uses the average price, not the expiry closing price.
Say you own a 30-day Asian call option on stock XYZ with a $100 strike price. Asian options compare the average stock price over 30 days to the strike price instead of the closing price. Profits occur when the average price reaches $100.
Asian Options Pros and Cons
Asian choices have several benefits:
These options are less volatile than others since they use an average price over a specific time.
Profit growth potential: When the underlying asset’s price trend is constant, averaging may boost profitability.
Smoothing effect: Averaging smooths short-term price swings and better reflects the asset’s worth.
However, there are several downsides:
If the asset’s price moves above the strike price but settles close it, the averaging method may diminish gains.
The option’s value and price might be affected by the averaging time.
Conclusion
Asian options provide traders an alternative investment, particularly for short-term market volatility insurance. They combine risk minimization and profit possibilities. Trading Asian options requires a solid understanding of pricing and risk management.
References and sources:
Investopedia: https://www.investopedia.com/terms/a/asianoption.asp
Wikipedia: https://en.wikipedia.org/wiki/Asian_option