Derivatives-based Portfolio Solutions
STRIKE OF RESET OPTIONS MOVES AGAINST INVESTOR
There are two main strike reset options, and both have an initial look-back period of typically one to three months, where the strike is set to be the highest (for a call) or lowest (for a put) traded value. While the look-back optionality moves against the investor, as the expiry of these options is multi-year (typically three), there is sufficient time for spot to move back in the investor’s favour, and the strike reset cheapens the option premium. While having a strike reset that moves the strike to be the most optimal for the investor is possible, the high price means they are unpopular and rarely trade. While the cheaper form of strike reset options does attract some flow due to structured products, they are not particularly popular.
Strike reset options perform best when there is an initial period of range trading
There are three possible outcomes to purchasing a strike reset option. Strike reset options can be considered a cheaper alternative to buying an ATM option at the end of the strike reset period, as the strike is roughly identical for two of the three possible outcomes (but at a lower price).
Strike reset options are therefore most suitable for investors who believe there will be an initial period of range trading, before the underlying moves in a favourable direction.
PAYOUT LOOK-BACK OPTIONS
Having a look-back option that selects the best value of the underlying (highest for calls, lowest for puts) increases the payout of an option – and cost. These options typically have a five-year maturity and typically use end-of-month or end-of-year values for the selection of the optimal payout.
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