What is 'Traded Average Price Option (TAPO)'

A traded average price option (TAPO) is an option contract where the investor's profit or loss has a basis, not solely on the price of the underlying asset at expiration, but on the difference between the strike price and the average price.

First offered in 1987, by the Banker's Trust in Tokyo, TAPOs, are also known as Asian Options. The first options were for oil but the instrument now mainly trades in metals.

BREAKING DOWN 'Traded Average Price Option (TAPO)'

Traded Average Price Option (TAPO) is an over-the-counter (OTC) product. Their payoff has a basis on the average price of the underlying asset over a specified timeframe. The determination of the average price is at contract creation. For example, settlement values originate from the difference between the strike price and the average price of the underlying asset on dates chosen over the life of the options contract.

Compared to standard options contracts, TAPOs have a lower premium due to their frequently short lifespan. The premium is also less than exchange traded contracts due to the way these specific contracts derive their value. Rather than a contract having a daily price, you are receiving an average price throughout a specified amount of days. Asian Options have a higher risk, which reflects in their lower premiums.

Who Uses Traded Average Price Options

TAPOs enable traders to manage volatility risk and offer a cost-effective alternative to standard listed options. They are options contracts with a price that is determined by the price of the underlying asset during a period as opposed to a value determined at maturity. TAPOs cost less than regular options and protect investors from market volatility risk. Having an American execution, holders may exercise at any time during the life of the contract on the specified dates. Asian options fall under the category of exotic options, and their use gains favor with commodity suppliers.

Common uses of Asian options include:

  1. A  business that is worried about the average exchange rate over a long period of time
  2. When a price at a particular point in time could be prone to manipulation
  3. In the event that the market for an underlying asset becomes highly volatile
  4. If pricing becomes ineffective because of thinly traded, low liquidity, markets

Trading Exchanges for TAPOs

One exchange where TAPOs are commonly traded is the London Metal Exchange (LME), a notable marketplace for futures in non-ferrous metals such as aluminum, copper, lead, and zinc. These call and put options come in contract lengths ranging from one to 27 calendar months, and the monthly average settlement price determines their settlement price. TAPOs, traded options and futures are all used as hedging tools. 

  1. Average Strike Option

    An average strike option is an option type where the payoff depends ...
  2. Exotic Option

    An exotic option is more complex or has a different structure ...
  3. Listed Option

    A listed option is a derivative security traded on a registered ...
  4. Vanilla Option

    A vanilla option gives the holder the right to buy or sell an ...
  5. Call Option

    A call option is an agreement that gives the option buyer the ...
  6. Underlying Option Security

    An underlying option security is the financial instrument (stock, ...
Related Articles
  1. Trading

    Examples Of Exchange-Traded Derivatives

    We look at some of the most common exchange-traded derivatives.
  2. Trading

    Option trading strategies: A guide for beginners

    Options offer alternative strategies for investors to profit from trading underlying securities. Learn about the four basic option strategies for beginners.
  3. Trading

    Futures and Options: How Are They Different?

    Options and futures may sound similar, but they are very different. Futures markets are a bit simpler to understand but carry a greater risk for investors.
  4. Investing

    Why Options Trading Is Not for the Faint of Heart

    Trading options is not easy and should only be done under the guidance of a professional.
  5. Trading

    Beginners Guide To Options Strategies

    Find out four simple ways to profit from call and put options strategies.
  1. How can derivatives be used to earn income?

    Learn how option selling strategies can be used to collect premium amounts as income, and understand how selling covered ... Read Answer >>
  2. What's Required for a Stock to Trade as an Option?

    Learn the four criteria companies must meet before options on their stock can be traded. Read Answer >>
  3. When is a put option considered to be 'in the money?'

    Learn about put options, how these financial derivatives work, and when put options are considered to be in the money related ... Read Answer >>
  4. How do I change my strike price once the trade has been placed already?

    Learn how the strike prices for call and put options work, and understand how different types of options can be exercised ... Read Answer >>
  5. How Do Speculators Profit From Options?

    Options are a risky game, but you can learn speculators' tricks to use them to your advantage. Read Answer >>
  6. Is it possible to trade forex options?

    Yes. Options are available for trading in almost every type of investment that trades in a market. Most investors are familiar ... Read Answer >>
Trading Center