DEFINITION of 'Average Price Put'
A type of option where the payoff depends on the difference between the strike price and the average price of the underlying asset. If the average price of the underlying asset over a specified time period exceeds the strike price of the average price put, the payoff to the option buyer is zero. Conversely, if the average price of the underlying asset is below the strike price of such a put, the payoff to the option buyer is positive and is the difference between the strike price and the average price. An average price put is considered an exotic option, since the payoff depends on the average price of the underlying over a period of time, as opposed to a straight put, the value of which depends on the price of the underlying asset at any point in time.
INVESTOPEDIA EXPLAINS 'Average Price Put'
Like all options, average price puts can be used for hedging or speculating, which depends on whether there is an exposure to the underlying asset. Buyers of average price puts may generally have a bearish opinion of the underlying asset or security.
For example, consider an oil and gas producer which holds the view that crude oil prices are set to decline and therefore desires to hedge its exposure. Assume that this producer wishes to hedge 100,000 barrels of crude oil production for one month. Further assume that crude oil is trading at $90 per barrel, and an average price put with a strike price of $90 expiring in one month can be purchased for $2.
After one month, when the option is about to expire, if the average price of crude oil is $85, the oil producer's gain would be $300,000 (i.e. the difference of $5 between the strike price and the average price less the option premium paid X 100,000 barrels). Conversely, if the average price of crude oil over the onemonth period is $93, the option would expire unexercised. In this case, the producer's loss on the hedging transaction would be equal to the cost of the option premium, or $200,000.

Short Selling
The sale of a security that is not owned by the seller, or that ... 
Asian Option
An option whose payoff depends on the average price of the underlying ... 
Strike Price
The price at which a specific derivative contract can be exercised. ... 
Exotic Option
An option that differs from common American or European options ... 
Average Price Call
A type of option where the payoff is either zero or the amount ... 
Exchange Traded Derivative
A financial instrument whose value is based on the value of another ...

What are the primary sources of market risk?
Market risk is the risk of loss due to the factors that affect an entire market or asset class. Market risk is also known ... Read Full Answer >> 
If a long call is owned on the record date of a stock, is the owner of the option ...
The owner of a long call for a stock is entitled to a dividend only if the option is exercised prior to the exdividend date, ... Read Full Answer >> 
How do I learn technical skills for trading commodities?
Many resources are available for those seeking to learn to trade commodities, also known as futures, directly from the major ... Read Full Answer >> 
What techniques can be used for hedging exposure to the electronics sector?
Hedging exposure to the electronics sector offers an investor a way to insulate his portfolio from losses during periods ... Read Full Answer >> 
How does market risk differ from specific risk?
Market risk and specific risk are two different forms of risk that affect assets. All investment assets can be separated ... Read Full Answer >> 
How can an investor profit from the cyclical nature of the electronics sector?
An investor can profit from the cyclical nature of the electronics sector in two ways. He can employ sector rotation, shifting ... Read Full Answer >>

Options & Futures
Introduction To Put Writing
Learn about a strategy that may be appropriate if you have a positive outlook on a stock. 
Options & Futures
Options Basics Tutorial
Discover the world of options, from primary concepts to how options work and why you might use them. 
Options & Futures
OutOfTheMoney Put Time Spreads
Learn about this lowrisk, bearish options strategy used to speculate on major market declines. 
Options & Futures
Use Married Puts To Protect Your Portfolio
Learn how put options can act as insurance for volatile stocks in your portfolio. 
Options & Futures
Prices Plunging? Buy A Put!
You can make money on a falling stock. Find out how going long on a put can lead to profits. 
Options & Futures
How To Trade Orange Juice Options
How do orange juice options work and which factors determine the orange juice valuations? Here's a sneak peak into the world of orange juice options. 
Fundamental Analysis
Explaining the Geometric Mean
The average of a set of products, the calculation of which is commonly used to determine the performance results of an investment or portfolio. 
Options & Futures
Why Is Best Buy Stock So Volatile?
We look at why BBY has been so volatile in the past and whether this trend is likely to continue or abate in the future. 
Investing Basics
What is a Stock Option?
An employee stock option is a right given to an employee to buy a certain number of company stock shares at a certain time and price in the future. 
Options & Futures
Circumvent Limitations of BlackScholes Model
Mathematical or quantitative modelbased trading continues to gain momentum, despite major failures like the financial crisis of 200809, which was attributed to the flawed use of trading models. ...