Lookback options are never out of the money and eliminate timing issues with entering and exiting the market.
However, they are more expensive than their vanilla European counterparts and are considered speculative.
With a Lookback call option, the contract isn’t necessarily traded at the market price. The holder has the benefit of hindsight; they can choose to purchase the asset at its lowest price during the life of the contract. Conversely, a Fixed Lookback Put allows the holder to sell the asset at the highest price during the life of the contract
The strike price can either be fixed or floating.
- Fixed Lookbacks have the strike determined at purchase
- Floating Lookbacks have the strike fixed at maturity. Holders of calls have the strike fixed at the lowest price during the life of the contract. Holders of puts have the strike fixed at the highest price during the life of the contract
Pricing Lookback Options with Excel
These Excel spreadsheets calculate the price of European style Lookback options. The closed-form analytical equations used to price options with Floating Strikes were derived by Goldman, Sosin & Satto (1979). The corresponding equations used to price Fixed Strikes were taken from Conze & Vizwanathan (1991). The formulas are summarized here.