Template:M summ Equity Derivatives 6.7

If you are in the business of trading equities, one thing you might worry about is your own lousy timing. If the point at which you decided to trade out of your position, there just happened to be some transient oompah that sent the market crazily higher, or lower, you might wind up closing out your position, or just being margined on it, at a bad price because, them’s the breaks.

Now the sort of fellow who is active in the market and trades a lot ought to be able to make peace with this risk, because it naturally irons itself out: most days, you’ll get a fair price; somedays you’ll be freakily to the bad, other days, freakily to the good. It is just the cost, as B.B. King would say, of bein’ the boss.

However: those of a more paranoid mien, or who who truck in less liquid, more fat-fingery stocks and want to build that ironing-out feature into individual position valuations, there is this idea of averaging. More importantly, it is the standard method for valuing and closing out US equity derivatives, because it is mostly likely to keep your tax people jumpy, who worry about re-characterising high-delta equity derivatives as disguised cash equity trades: de-linking your price from anything conceivably hedgeable helps with that. As to this see volume-weighted average price, being the market-preferred method of achieving that.

Except where mandated by US tax, expect brokers to be less than keen about averaging precisely because it is difficult to accurately hedge, and also it is a faff.