Path Dependent Option

AAA

DEFINITION of 'Path Dependent Option'

The right, but not the obligation, to buy or sell an underlying asset at a predetermined price during a specified time period, where the price is based on the fluctuations in the underlying's value during all or part of the contract term. A path dependent option's payoff is determined by the path of the underlying asset's price.

INVESTOPEDIA EXPLAINS 'Path Dependent Option'

A basic American option is one type of path dependent option. Because it can be exercised at any time prior to expiration, its value will change as the underlying asset's value changes. An Asian option, also called an average option, is another type of path dependent option, because its payoff is based on the average price of the underlying asset during the contract term. Similarly, a barrier option would be considered a path dependent option because its value changes if the underlying asset reaches or surpasses a specified price. The lookback option and Russian option are also path-dependent options.



RELATED TERMS
  1. Exotic Option

    An option that differs from common American or European options ...
  2. Barrier Option

    A type of option whose payoff depends on whether or not the underlying ...
  3. Lookback Option

    An exotic option that allows investors to "look back" at the ...
  4. Underlying

    1. In derivatives, the security that must be delivered when a ...
  5. Asian Option

    An option whose payoff depends on the average price of the underlying ...
  6. Multibank Holding Company

    A company that owns or controls two or more banks. Mutlibank ...
Related Articles
  1. Investing Basics

    Pin Down Stock Price With Real Options

    How can you assign a value to what a company may do with its business in the future? We explain how it works.
  2. Options & Futures

    Options Basics Tutorial

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

    Investing "Road Less Traveled" May Lead To Riches

    Using the same strategy year after year may be comfortable, but it's not always profitable.
  4. Options & Futures

    What are the most common momentum oscillators used in options trading?

    Read about some of the most common technical momentum oscillators that options traders use, and learn why momentum is a critical concept for options trading.
  5. Options & Futures

    How are Bollinger Bands® used in options trading?

    Use Bollinger Bands to identify volatility changes and place options trades at the right time; profit in bull or bear markets using these strategies.
  6. Options & Futures

    Stock Futures vs Stock Options

    A full analysis of when is it better to trade stock futures vs when is it better to trade options on a particular stock. A quick overview of how each of them works and why would a trader, investor, ...
  7. First time stock investors may ask, is there any way to buy insurance on stocks to prevent losses?
    Options & Futures

    Stock Safety: Top 3 Ways to Limit Your Losses

    First time stock investors may ask, is there any way to buy insurance on stocks to prevent losses?
  8. Options & Futures

    Applying Binary Options To Equity Markets

    A binary option payout depends on the outcome of a “yes” or “no” proposition, related to the difference between underlying asset price and strike price.
  9. Investors can use derivative securities to effectively buy insurance on their individual holdings or on their portfolio as a whole.
    Options & Futures

    Can You Buy Stock Insurace? 3 Strategies to Limit Stock Losses

    Investors can use derivative securities to effectively buy insurance on their individual holdings or on their portfolio as a whole.
  10. With more ETFs to trade, the risks associated with these investments have grown. To mitigate these risks, ETF options are a hedging strategy for traders.
    Mutual Funds & ETFs

    ETF Options Hedge Risk of ETF Trades

    With more ETFs to trade, the risks associated with these investments have grown. To mitigate these risks, ETF options are a hedging strategy for traders.

You May Also Like

Hot Definitions
  1. Multinational Corporation - MNC

    A corporation that has its facilities and other assets in at least one country other than its home country. Such companies ...
  2. SWOT Analysis

    A tool that identifies the strengths, weaknesses, opportunities and threats of an organization. Specifically, SWOT is a basic, ...
  3. Simple Interest

    A quick method of calculating the interest charge on a loan. Simple interest is determined by multiplying the interest rate ...
  4. Special Administrative Region - SAR

    Unique geographical areas with a high degree of autonomy set up by the People's Republic of China. The Special Administrative ...
  5. Annual Percentage Rate - APR

    The annual rate that is charged for borrowing (or made by investing), expressed as a single percentage number that represents ...
  6. Free Carrier - FCA

    A trade term requiring the seller to deliver goods to a named airport, terminal, or other place where the carrier operates. ...
Trading Center