Markets unPACKed: Why Not Explore Asian Options?

Why Not Explore Asian Options?


At Pack Creek Capital, we run many different hedging and trading books, and we are consistently looking for smart and effective trades. With that said, we are using the Asian options more often.

To refresh your memory of an Asian option: an option type where the payoff depends on the average price of the underlying asset over a certain period of time. The key to this option is the average price part.

Asian options have lower volatility due to the averaging component. The average can vary, depending on the underlying asset. Since we are agricultural derivatives traders, we will go back to our good ol’ corn markets in this example. Asian options are typically used to solve a problem. Our problem in the corn market is capturing the ‘seasonal average.’

On February 26, we published “What is a Seasonal Average in Grains?” in which we address the summer highs in grain futures. A short futures position is used by a producer to lock in a price of a commodity that he is going to sell in the future, and averaging the highs is a common strategy. It is done by selling futures daily, from mid-April or May through August.

If you sell a futures contract at $4.50 on April 15 and futures rally to $5 by May 1, then continue to rally to $5.50 by June, and maybe up to $6 by July, you are carrying a short futures position in a rising market leading to increased loss and increased margin calls to keep that position.

We are working with Asian puts to track the average of corn futures during the seasonal averaging period and sell futures on rallies. By putting a put in place, we have the right but not the obligation to sell at the strike price (the average of the futures price, from start date to end date), or sell it for a payoff if the put is in-the-money. If it is out-of-the-money, our biggest loss was the cost of the put.

Look at an Asian put (the average of futures price) in the grey line vs. spot price of December corn futures for the last five years, depicted in figures 1 – 5. It was in-the-money at the end of the program every year but 2020, allowing us to get a payout and sell futures at better prices (hopefully). To clarify, Pack Creek Capital did not trade this trade in these years; these are hypothetical examples as an exploration of this idea. This is not intended as a trading recommendation and views expressed are subject to change.


Figure 1: 2016.


Figure 2: 2017.


Figure 3: 2018.


Figure 4: 2019.


Figure 5: 2020.


With 2021 showing very different price action to years past, it is worth exploring trades and being innovative.


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Disclosure: The risk of loss in trading futures and/or options is substantial. Past performance is not indicative of future results. The information in this message derived from third-party sources is believed to be accurate and reliable; PCC does not guarantee the accuracy or completeness of the information. Opinions expressed in this material are subject to change without notice. The material in this newsletter is not intended to be used as trading recommendations. This report should not be interpreted as a request to engage in any transaction of futures, options, and/or OTC derivatives. The information contained in this material is not to be relied upon in substitution for the exercise of your independent judgment. Seek independent financial, tax, legal and accounting advice from your own professional advisers, based upon your particular circumstances.