Definition of Lookback option:
Also known as a hindsight option, a lookback option allows the holder the advantage of knowing history when determining when to exercise their option. This type of option reduces uncertainties associated with the timing of market entry and reduces the chances the option will expire worthlessly. Lookback options are expensive to execute, so these advantages come at a cost.
As a type of exotic option, the lookback allows the user to "look back," or review, the prices of an underlying asset over the lifespan of the option after it has been purchased. The holder may then exercise the option based on the most beneficial price of the underlying asset. The holder can take advantage of the widest differential between the strike price and the price of the underlying asset. Lookback options do not trade on major exchanges. Instead, they are unlisted and trade over-the-counter (OTC).
In which the payout is based on the lowest (in case of a put) or the highest (in case of a call) level reached by the underlying asset or index during the options expiration period.
How to use Lookback option in a sentence?
- Lookback options are only available Over The Counter (OTC) and not on any of the major exchanges.
- These options are expensive to establish and the potential profits are often nullified by the costs.
- Lookback options are exotic options that allow a buyer to minimize regret.
Meaning of Lookback option & Lookback option Definition