DEFINITION of 'Forward Start Option'

The advance purchase of a put or call option with a strike price that will be determined at a later date, typically when the option becomes active. A forward start option becomes active at a specified date in the future; however, the premium is paid in advance, and the time to expiration and the underlier are established at the time the forward start option is purchased.

BREAKING DOWN 'Forward Start Option'

A group of consecutive forward start options is called a ratchet option or cliquet option. In this instance, the first forward start option is active immediately, and each successive forward start option becomes active when the previous one expires. Forward start options are often priced using a calculation known as the Rubenstein formula.

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