Lookback Option

AAA

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

INVESTOPEDIA EXPLAINS 'Lookback Option'

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. 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.

RELATED TERMS
  1. Underlying

    1. In derivatives, the security that must be delivered when a ...
  2. Mid-Atlantic Option

    An option that can be exercised at different times during the ...
  3. Option

    A financial derivative that represents a contract sold by one ...
  4. Strike Price

    The price at which a specific derivative contract can be exercised. ...
  5. Shout Option

    An exotic option that allows the holder to lock in a defined ...
  6. Settlement Date

    1. The date by which an executed security trade must be settled. ...
Related Articles
  1. Getting Acquainted With Options Trading
    Options & Futures

    Getting Acquainted With Options Trading

  2. Options Basics Tutorial
    Options & Futures

    Options Basics Tutorial

  3. What do all of the letters in a stock ...
    Options & Futures

    What do all of the letters in a stock ...

  4. How To Buy Oil Options
    Options & Futures

    How To Buy Oil Options

comments powered by Disqus
Hot Definitions
  1. Last In, First Out - LIFO

    An asset-management and valuation method that assumes that assets produced or acquired last are the ones that are used, sold ...
  2. Ghosting

    An illegal practice whereby two or more market makers collectively attempt to influence and change the price of a stock. ...
  3. Elasticity

    A measure of a variable's sensitivity to a change in another variable. In economics, elasticity refers the degree to which ...
  4. Tangible Common Equity - TCE

    A measure of a company's capital, which is used to evaluate a financial institution's ability to deal with potential losses. ...
  5. Yield To Maturity (YTM)

    The rate of return anticipated on a bond if held until the maturity date. YTM is considered a long-term bond yield expressed ...
  6. Net Present Value Of Growth Opportunities - NPVGO

    A calculation of the net present value of all future cash flows involved with an additional acquisition, or potential acquisition. ...
Trading Center