Lookback Option

Filed Under » , ,
Dictionary Says

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 Says

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.

Articles Of Interest

  1.

    Getting Acquainted With Options Trading

    Learn more about stock options, including some basic terminology and the source of profits.

  2. Options Basics Tutorial

    Discover the world of options, from primary concepts to how options work and why you might use them.

  3. What do all of the letters in a stock option ticker symbol mean?

    The option ticker explains four main things about the option: the underlying stock, whether it is a call or a put option, the expiration month and the strike price. An option ticker is quoted ...

  4. Basic Investment Objectives

    You might know about different asset types, but do you know how each type contributes to a particular goal?

  5. Exploring The Current Account In The Balance Of Payments

    Learn how a country's current account balance reflects the country's economic health.

  6. Understanding And Playing The Dow Jones Industrial Average

    Learn strategies for investing in this price-weighted index and how to interpret its movements.

  7. Writing A Covered Call

    Writing an option is the process of selling to another investor the right, but not the obligation, to buy or sell a stock at a given price in the near future. It can also be referred to as shorting ...

  8. Arbitrage Squeezes Profit From Market Inefficiency

    This influential strategy capitalizes on the relationship between price and liquidity.

  9. Making It Big On Wall Street

    Read about some of the most glamorous Wall Street jobs and what it takes to land one.

  10. Quants: The Rocket Scientists Of Wall Street

    Blend math, finance and computer skills to command a high - and well deserved - salary.
comments powered by Disqus
Marketplace
Hot Definitions

  1. Xenocurrency

    A currency that trades in markets outside of its domestic borders.

  2. Wanton Disregard

    A standard of severe negligence. Wanton disregard is a very serious accusation that indicates that a person behaved extremely recklessly.

  3. Ultra ETF

    A class of exchange-traded funds (ETF) that employs leverage in an effort to achieve double the return of a set benchmark.

  4. Toehold Purchase

    A purchase of less than 5% of a target company's outstanding stockmade by an acquiring company. A toehold purchase of just under 5%, while not a significant stake in a firm, allows the shareholders a "toe-holds" grip on the company and its decision making.

  5. Samurai Bond

    A yen-denominated bond issued in Tokyo by a non-Japanese company and subject to Japanese regulations.

  6. Chartalism

    A non-mainstream theory of money that emphasizes the impact of government policies and activities on the value of money.
Trading Center
http://sp.fastclick.net/ad/tr/10858-64082-15546-0?mpt=f4261041330014a5353040fd5d33c54b