A lookback option is an exotic option in which the strike price is only set upon exercise.
The base price is the best price (from the perspective of the option buyer) that the base value has reached during the option term. In the case of a call option is the lowest price, with a put option is the highest.
At maturity, the buyer of the option receives the difference between the market price of the underlying asset at the time of maturity and the strike price now set. In the worst case, this difference is zero (if the price of the underlying asset has reached the optimum on the due date) and is otherwise positive. The option can therefore never be “ out of the money ”.
With a lookback option, the risks of the option buyer are low and his chances are very high, which is why the option premium is high.
As a variant, it is offered that the buyer of the option receives the difference between a strike price fixed at the beginning and the best price that the base value has reached during the term of the option. This variant is called " fixed strike " in English , while the name of the variant described above is " floated strike ".
- M. Barry Goldman, Howard B. Sosin, Mary Ann Gatto: Path-dependent options: "Buy at the Low, Sell at the High". In: Journal of Finance. 34, 5, December 1979, ISSN 0022-1082 , pp. 1111-1127.
- Average, lookback and other exotic options (representation with formulas in Financial Numerical Recipes in C ++ by Bernt Arne Ødegaard)