Strike Reset Options

Learn about European strike reset options, and download a pricing spreadsheet.

Reset options are somewhat similar to lookback options. However, the strike is reset to the security price at a predetermined time if the option is out-of-the-money.

  • For a call option, this happens when the security price dips below the strike price
  • For a put option, this happens when the security price rises above the initial strike price

This extra flexibility means that reset options cost more than floating strike lookback options.

The price of these options are given by the following formulas, derived by Gray and Whaley (1999) and referenced by Haug in Derivative Models on Models (2008).

Formula for the pricing of European strike reset options

where

  • c(S,K) and p(S,K) are call and put prices
  • S is the spot sprice
  • K is the strike price
  • r is the risk-free rate
  • d is the dividend yield
  • σ is the volatility
  • T is the time to expiry
  • τ is the time to reset
  • N is the cumulative normal distribution
  • M is bivariate normal distribution

N() is calculated by Excel’s NormSDist() function. However, Excel does not offer a tool to calculate the bivariate cumulative normal distribution, M(). Instead, a VBA approximation given by West is used.

An Excel spreadsheet to price strike reset options

This Excel spreadsheet implements the above formulas.

 Download Excel Spreadsheet to Price Strike Reset Options


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