Lookback option - Financial definition
Financial acronyms
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Concise definition of the term lookback option
A lookback option is a financial option the value of which will depend on the minimum or the maximum price of its underlying attained during the option's lifetime. Lookback options can have either a fixed strike or a variable strike.
Comprehensive definition of the term lookback option
Lookback options are part of the family of so-called path-dependent options.
Lookback option with fixed strike
In this variation, the strike is fixed from the beginning, like it is the case with vanilla options.
The profit at expiry for the option holder is determined by comparing the strike with the most favorable price of the underlying
reached during the life of the option.
The value at expiry of a lookback call option with a fixed strike will be the difference between the maximum price
of the underlying (Smax) and strike (K) of the option.
The value at expiry of a lookback put option with a fixed strike will be the difference between strike (K) of the option
and the minimum price of the underlying (Smin).
Lookback option with variable strike
The value at expiry of a lookback call option with a variable strike will be the difference between the price
of the underlying (ST) at expiry and the minimum price of the underlying (Smin) during the options life.
The value at expiry of a lookback put option with a variable strike will be the difference between
the maximum price of the underlying (Smax) during the options life and the price of the underlying (ST) at expiry.