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What Is an Average Option?

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  • Written By: Kristie Lorette
  • Edited By: O. Wallace
  • Last Modified Date: 06 November 2016
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An average option is also known as an Asian option, and comes in two basic forms. The first is an average rate option and the second is an average strike option. An average option price is calculated by an underlying factor, which is a security, that is also linked to the date range or the options' lifespan.

These options are also known as an average price option. This type of option is a cash-settled option. The payoff, or the return on investment, for the investor of this type of option is determined by taking the difference of the average price of the underlie associated with the option, the duration or lifespan of the option and the fixed strike price of the option.

The second type of average option is an average strike option. This type of option is either a physically settled option or a cash settled one. This type of option is similar to an average option. The difference between the two options is that the average strike is equal to the average price of the underlying security according to the lifespan of the option. Both types of the average option has puts and calls as options. In order to exercise the options, it is typically on the European, rather than the U.S. market.

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The primary benefit of an average or Asian option is that buying the contract option is usually less expensive than buying an American contract option. Investors and consumers describe average options as more straight forward than American options. Determining the value of the average option, however, is more complex than that of American or even European options. This type of option is also described as being less complex than exotic and hybrid versions of option contracts that exist.

In general, an option provides the buyer or holder of the option to buy the security or investment that the option is linked. In this case, the average option or the Asian option is a specific type of option that is traded on a foreign market to the U.S. stock market. The problem with buying options is that the buyer pays the price to pay the option upfront, but never in fact exercises the right to buy the security that the option is associated with. This means that the buyer of the option is out-of-pocket the cost of purchasing the option, whether or not they exercise the option to buy or not.

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