Look back Option is an unusual option containing provision to look back at the price of underlying security throughout the life. Such an option can also be exercised depending upon the optimal value of the underlying asset. Any sort of uncertainties associated with entry time in the market are reduced.
Two types of look back option are available in the market.
1. Fixed – Here the strike price of the option is fixed during the purchase. Nevertheless, option is not supposed to be exercised at underlying’s market price: when faced with a call, one can look back over the option’s life and can then decide the point in which they would like to exercise the option. Ideally, this would occur only when the price of the underlying asset was highest over the option’s life. When faced with a put option, you will exercise the option when the price of the underlying security is lowest during the life of the option. Thus settlement of a look back option takes place at a past date and at selective market price that occurred in the past as compared to the fixed strike.
2. Floating – In case of such an option, the strike price of the option is fixed only at maturity. This goes opposite as compared to fixed option. For a call option, strike price would be when the underlying reaches the lowest price and for a put option, strike price would be reached when the underlying reaches the highest price during the life of the option. Settlement of option takes place at market and in opposition to the floating strike.
Such options have now started appealing to the investors. However, they are quite speculative and can turn out to be expensive.
Tags: Fixed, floating, Look Back Option, underlying security
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