Lookback Option

Lookback Option

An exotic option that allows investors to "look back" at the underlying prices occurring over the life of the option, and then exercise based on the underlying asset's optimal value.

Notes:

This type of option reduces uncertainties associated with the timing of market entry.

There are two types of lookback options:

1. Fixed - The option's strike price is fixed at purchase. However, the option is not exercised at the market price: in the case of a call, the option holder can look back over the life of the option and choose to exercise at the point when the underlying asset was priced at its highest over the life of the option. In the case of a put, the option can be exercised at the asset's lowest price. The option settles at the selected past market price and against the fixed strike.

2. Floating - The option's strike price is fixed at maturity. For a call, the strike price is fixed at the lowest price reached during the life of the option, and, for a put, it is fixed at the highest price. The option settles at market and against the floating strike.

While lookback options are appealing to investors, they can be expensive and are also considered to be quite speculative.

See also: Asian Tail, Balloon Option, Cliquet Option, Exotic Option, Mid-Atlantic Option, Option, Settlement Date, Settlement Price, Shout Option, Strike Price, Underlying, Vanilla Option

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Lookback option

An option that allows the buyer to choose as the option strike price any price of the underlying asset that has occurred during the life of the option. For a call option, the buyer will choose the minimum price; for a put option, the buyer will choose the maximum price. This option will always be in the money.