# Asian Options > Asian options pay based on the average price over a period rather than one final price. Learn the types, why they are cheaper, who uses them and how they are priced. Source: https://learn.tradelabsai.com/options/asian-options/ Track: Options · Level: Advanced · Updated: 2026-10-03 Publisher: TradeLabs AI (https://tradelabsai.com). Education, not financial advice. Cite as: TradeLabs Learn, "Asian Options", https://learn.tradelabsai.com/options/asian-options/ An Asian option, also called an average price or average rate option, has a payoff based on the average price of the underlying over a set period rather than the price on one day. A one year Asian call on crude oil might pay the amount by which the average daily settlement price over the year exceeds the strike. Averaging reduces the effect of short term swings and manipulation near expiry, which makes Asian options cheaper than standard options and a natural fit for businesses whose exposure builds up over time. ## The name The term is often traced to Bankers Trust traders working in Tokyo in 1987, who priced options on the average price of crude oil. The name stuck even though the product has nothing specifically Asian about it. ## Types of Asian options | Type | Payoff for a call | |---|---| | Average price (fixed strike) | max(average price minus strike, 0) | | Average strike (floating strike) | max(final price minus average price, 0) | | Arithmetic average | Uses the simple average of observed prices | | Geometric average | Uses the geometric average; has a closed form price | Most traded Asian options use arithmetic averages of daily or monthly prices, matching how businesses actually incur costs. ## Why Asian options are cheaper The average of prices over a period moves less than the price at a single point, so the effective volatility is lower. For an average over the whole life of the option, effective volatility is roughly the underlying volatility divided by √3 under simple assumptions, about 58% of it. **Example: Cost comparison** A one year at the money call on an asset at $100 with 20% volatility and a 5% rate costs about $10.45. An arithmetic average price call, averaging daily over the full year, costs about $5.80 in simulation. The Asian option gives up the chance to profit from a spike at the very end, but for a buyer exposed to the average price all year, it is the better match and roughly half the cost. See [Monte Carlo Option Pricing](https://learn.tradelabsai.com/options/monte-carlo-option-pricing/). ## Who uses Asian options - **Airlines and transport companies** hedging average fuel costs over months. See [Crude Oil](https://learn.tradelabsai.com/commodities/crude-oil/). - **Manufacturers** buying metals or energy continuously. See [Commodity Market Fundamentals](https://learn.tradelabsai.com/commodities/commodity-market-fundamentals/). - **Exporters and importers** hedging monthly currency flows. - **Commodity producers** selling output throughout the year. Many commodity swaps and options settle on monthly average prices for exactly these reasons, and exchanges such as CME list average price options on some energy and metals contracts. **Example: An airline hedge** An airline expects to buy 10 million gallons of jet fuel evenly over the next quarter. It buys an average price call with a strike of $2.80 per gallon, settled on the quarter's average daily price. If prices spike to $3.20 for a week but average $2.95 for the quarter, the option pays $0.15 per gallon, $1.5 million, offsetting the higher average cost the airline actually paid. A standard option expiring at quarter end would have paid based on just one day's price, which might have been far from the airline's real cost. See [Hedging](https://learn.tradelabsai.com/markets/hedging/). ## Manipulation resistance Because the payoff depends on many observations, a short spike or drop near expiry has a small effect. This makes Asian options attractive in thin markets where a single closing price could be pushed around. See [Market Manipulation](https://learn.tradelabsai.com/industry/market-manipulation/). ## Pricing - **Geometric average options** have closed form prices under Black Scholes assumptions, because the geometric average of lognormal prices is itself lognormal. - **Arithmetic average options** have no exact closed form. Practitioners use Monte Carlo simulation (often with the geometric version as a control variate), moment matching approximations such as the Turnbull Wakeman method, or finite difference methods. ## Greeks Once part of the averaging period has passed, the average is partly fixed, so the option's sensitivity to further moves falls. Delta and gamma shrink as the averaging period progresses, making hedging smoother than for standard options near expiry. ## Common mistakes - **Comparing Asian and vanilla premiums directly** without considering the different payoffs. - **Mismatching averaging dates** with actual exposure. - **Ignoring how the average is defined:** source, frequency and treatment of holidays matter. ## Frequently asked questions ### What is an Asian option? An option whose payoff depends on the average price of the underlying over a period, rather than the price at a single date. ### Why are Asian options cheaper than regular options? Because the average price is less volatile than the price on a single day, which lowers the option's expected payoff. ### Who uses Asian options? Mainly businesses with exposure spread over time, such as airlines, manufacturers and commodity producers. Next, learn options paid in another currency in [Quanto Options](https://learn.tradelabsai.com/options/quanto-options/). ## Continue learning - Next lesson: [Quanto Options](https://learn.tradelabsai.com/options/quanto-options/) - Previous lesson: [Binary Options](https://learn.tradelabsai.com/options/binary-options/) - Related: [Binary Options](https://learn.tradelabsai.com/options/binary-options/): Binary options pay a fixed amount if a condition is met and nothing if not. Learn how they are priced, how they relate to prediction markets and the scams to avoid. - Related: [Exotic Options Explained](https://learn.tradelabsai.com/options/exotic-options-explained/): Exotic options have payoffs or features beyond standard calls and puts. Learn the main types, including barriers, binaries, Asians and quantos, and why they exist. - Related: [Monte Carlo Option Pricing](https://learn.tradelabsai.com/options/monte-carlo-option-pricing/): Monte Carlo pricing simulates many random price paths and averages the discounted payoffs. Learn the method, a Python sketch, accuracy, variance reduction and uses. - Related: [Commodity Market Fundamentals](https://learn.tradelabsai.com/commodities/commodity-market-fundamentals/): Commodity prices are driven by physical supply and demand, inventories, the dollar and weather. Learn the main sectors, key drivers, participants and data. - Related: [Hedging](https://learn.tradelabsai.com/markets/hedging/): Hedging means taking a position that offsets the risk of another. Learn how hedges work with options, futures and correlated assets, their costs and limits. - Related: [VWAP, TWAP and POV Execution](https://learn.tradelabsai.com/orders/vwap-twap-and-pov-execution/): VWAP, TWAP and POV algorithms split large orders over time to reduce impact. Learn how each one schedules trades, its strengths and when to use it.