Look-back Options
Derivatives-based Portfolio Solutions


There are two types of look-back options, strike look-back and payout look-back, and both are usually multi-year options. Strike reset (or look-back) options have their strike set to the highest, or lowest, value within an initial look-back period (of up to three months). These options are normally structured so the strike moves against the investor in order to cheapen the cost. Payout look-back options conversely tend to be more attractive and expensive than vanilla options, as the value for the underlying used is the best historical value. As with all light exotics, these options are European and OTC.

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).
  • Spot moves in direction of option payout. If spot moves in a direction that would make the option ITM, the strike is reset to be equal to spot as it moves in a favourable direction, and the investor is left with a roughly ATM option.
  • Range-trading markets. Should markets range trade, the investor will similarly receive a virtually ATM option at the end of the strike reset period.
  • Spot moves in opposite direction to option payout. If spot initially moves in the opposite direction to the option payout (down for calls, up for puts), then the option strike is identical to an option that was initially ATM (as the key value of the underlying for the strike reset is the initial value) and, hence, OTM at the end of the strike rest period. The downside of this outcome is why strike reset options can be purchased for a lower cost than an ATM option.
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.

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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