TAPO

Apparently, there's a Tapo District in Peru. There's also a Tapo language, which is spoken in sections of Ethopia. None of that has anything to do with this definition, however. We were just planning our next vacation and had all these Tapo-related notes ready to go.

This TAPO has to do with the options market. The name stands for "traded average price option."

To explain how it works, let's take a look at how regular options work. Most options pay off based on the difference between the price of an underlying asset and the strike price of the option.

You hold an option to buy 100 shares of AAPL at $200 a share. The day the option expires, AAPL finishes at $220. The $20 difference defines the the profit from the option. That situation describes the usual setup.

A TAPO works differently. Instead of the single trading price for the asset, the profit and loss get determined using an average price. For a TAPO, it doesn't really matter much that AAPL traded at $220 at expiration. If it had an average price of $190 over the course of the time period in question, the option would be worthless. You'd just let it expire without exercising it.

The option's value gets determined by the difference between the strike price and the average price. So if AAPL closes at expiration at $220, but has an average trading price of $210, then the profit for that option is $10...not $20. The key stat is the average price, compared to the strike price.