The average price put is a type of "exotic" (meaning out of the ordinary) put option. A put is a bet that the price of the underlying asset will go down. The exotic part comes in because the payoff will be the difference between the average price of the underlying asset over the life of the option and the stated strike price (the original agreed upon price).
Average price puts can be used for speculating or hedging, with the buyer having a generally bearish opinion of the underlying asset.
Let’s say a pork bellies producer believes prices will be going down. She wants to pig out on puts, buying them to hedge against her exposure (her main product being pork bellies, after all). She decides to hedge 1,000 pounds of bellies. Pork bellies are now trading at $25 per pound and an average price put option expiring in two months can be purchased for $3 with a strike price of $20.
At the end of the two months, when the option is set to expire, the average price of pork bellies was $10 per pound, the producer’s gain would be $7,000 per 1000 pound unit. The underlying put was the right to sell the pork bellies for $20 (i.e. they were at the money at the time) so while the bellies went down 10 bucks, the put's intrinsic value went up $7, net of the $3 premium paid originally for it.
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Finance: What Is a Call Option?25 Views
finance a la shmoop. what is a call option? option? option, where are you? okay
yeah yeah. not phone options, call options. and a close but no cigar. a call option [man smokes in a tub of cash]
is the right to call or buy a security. the concept is easy the math is hard.
you think Coca Cola's poised for a breakout as they go into the new low
calorie beverage business. their stock is at 50 bucks a share and you can buy a [man stands on a stage as crowd cheers]
call option for $1. well that call option buys you the right
to then buy coke stock at 55 bucks a share anytime you want in the next
hundred and 20 days. so let's say Coke announces its new sugarless drink flavor
zero it's two weeks later and the stock skyrockets to fifty eight dollars a
share. you've already paid the dollar for the option now you have to exercise it. [man lifts weights]
so you buy the stock and you're all in now for fifty five dollars plus one or
fifty six bucks a share and your total value is now fifty eight bucks. well you
could turn around today and sell the bundle that moment, and you'll have
turned your dollar into two dollars of profit really fast. and obviously had the [equation on screen]
stock not skyrocketed so quickly well you would have lost everything. still you
lucked out and now you're sitting on some serious cash, courtesy of your call [two men in a tub of cash]
options. as for Coke flavor zero turned out to be nothing more than canned water.
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