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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.