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Trading Asian Style Stock Options

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http://www.options-trading-education.com/7073/trading-asian-style-stock-options/ …

http://www.options-trading-education.com/7073/trading-asian-style-stock-options/

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.

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  • 1. Trading Asian Style Stock OptionsBy www.options-trading-education.com
  • 2. Not much used in theUSA, trading Asian style stock options, offers a uniquehttp://www.options-trading-education.com/7073/trading-asian-style-stock-options/
  • 3. approach to averaging risk and reward in stock options trading. http://www.options-trading-education.com/7073/trading-asian-style-stock-options/
  • 4. An Asian style option is unique in that the paymentfor the buyer, should he or she choose to http://www.options-trading-education.com/7073/trading-asian-style-stock-options/
  • 5. execute the contract, is determined by the average price of the underlying stockover an agreed upon period of time. http://www.options-trading-education.com/7073/trading-asian-style-stock-options/
  • 6. This approach reduces thepotential for profit in buying options and also, to adegree, reduces the potential for loss for the seller.http://www.options-trading-education.com/7073/trading-asian-style-stock-options/
  • 7. This approach differs fromAmerican style stock options and European style stock options inhttp://www.options-trading-education.com/7073/trading-asian-style-stock-options/
  • 8. that each of the later stylesallows for payment based onthe price of the underlying at the time of execution.http://www.options-trading-education.com/7073/trading-asian-style-stock-options/
  • 9. In trading American style options this can be any timeduring the contract period and http://www.options-trading-education.com/7073/trading-asian-style-stock-options/
  • 10. in trading European styleoptions this is the price at the end of the contract period.http://www.options-trading-education.com/7073/trading-asian-style-stock-options/
  • 11. Like both European style and American style options, the trader, if he is trading in anhttp://www.options-trading-education.com/7073/trading-asian-style-stock-options/
  • 12. exchange, can usually exit the contract, with profit or loss, by simply executing thehttp://www.options-trading-education.com/7073/trading-asian-style-stock-options/
  • 13. opposite trade on the underlying stock with the same expiration date.http://www.options-trading-education.com/7073/trading-asian-style-stock-options/
  • 14. Asian options were first introduced in Tokyo in the 1980’s.http://www.options-trading-education.com/7073/trading-asian-style-stock-options/
  • 15. A useful aspect of tradingAsian style stock options iswhen companies reimbursetheir employees with stock options.http://www.options-trading-education.com/7073/trading-asian-style-stock-options/
  • 16. Trading Asian Style Stock Options and Stock Options for Employeeshttp://www.options-trading-education.com/7073/trading-asian-style-stock-options/
  • 17. Asian options are also referredto as “average value options.”An advantage of trading Asian style http://www.options-trading-education.com/7073/trading-asian-style-stock-options/
  • 18. stock options is that they are said to reduce the risk of market manipulation just before theyhttp://www.options-trading-education.com/7073/trading-asian-style-stock-options/
  • 19. mature as a rise in the priceon the last day of the optionscontract will only slightly raise the value of the payoff. http://www.options-trading-education.com/7073/trading-asian-style-stock-options/
  • 20. Because the averaging aspectof this kind of options contract tends to reduce volatility, http://www.options-trading-education.com/7073/trading-asian-style-stock-options/
  • 21. Asian style options are commonly cheaper thanAmerican or European style options.http://www.options-trading-education.com/7073/trading-asian-style-stock-options/
  • 22. This can also be a decidedadvantage for companies that need to expense employee stock options.http://www.options-trading-education.com/7073/trading-asian-style-stock-options/
  • 23. Are There Advantages to Trading Asian Style Stock Options?http://www.options-trading-education.com/7073/trading-asian-style-stock-options/
  • 24. Because Asian style optionsare less expensive the cost of trading them is less prohibitive.http://www.options-trading-education.com/7073/trading-asian-style-stock-options/
  • 25. To the extent that a trader engages in a profitableoptions trade, he may be less afraid ofhttp://www.options-trading-education.com/7073/trading-asian-style-stock-options/
  • 26. staying in the trade when thevalue of the contract peaks, as a sudden fall in value will not drastically affect the contract price. http://www.options-trading-education.com/7073/trading-asian-style-stock-options/
  • 27. Those trading Asian style stockoptions will always be thinking of the average value of the http://www.options-trading-education.com/7073/trading-asian-style-stock-options/
  • 28. underlying over the pre-determined time period andnot of the value at any given point during the day.http://www.options-trading-education.com/7073/trading-asian-style-stock-options/
  • 29. Likewise, the seller of such a contract may be lessconcerned that he will need to sell in the http://www.options-trading-education.com/7073/trading-asian-style-stock-options/
  • 30. case of a call or buy in thecase of put at a uniquely high price due to a momentary market fluctuation.http://www.options-trading-education.com/7073/trading-asian-style-stock-options/
  • 31. As with all options trading it is important to follow through with both fundamental and technical http://www.options-trading-education.com/7073/trading-asian-style-stock-options/
  • 32. analysis of the underlying inorder to increase the odds of a profitable trade.http://www.options-trading-education.com/7073/trading-asian-style-stock-options/

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