Lookback option
Definition · Level 10 · Derivatives pricing
Keep reading with Tradecraft
Without an account, you can read three definitions every 30 days. Tradecraft explains all 738 terms and strategies, with the lessons that teach them, flashcards that come back before you forget, quizzes and a payoff lab.
Payoff uses the best maximum or minimum reached during the life — perfect hindsight, so it costs more than the vanilla.
Example
Floating-strike call pays ST − lowest price seen.
Where Tradecraft teaches it
Level 10 · Derivatives pricing, in the lesson “Asians, worst-ofs, quantos & variance swaps”: Path-dependent and multi-asset payoffs, who is long correlation, and how variance swaps pay.
Related terms
- Asian optionAverage-price option: payoff on the average over a set of fixings.
- Basket optionOption on a weighted average of several assets; cheaper than the sum of single-asset options, and worth more as correlation rises.
- Exotic optionAny option whose payoff differs from a plain (vanilla) call or put: it can depend on the path (barriers, averages, lookbacks), on several assets…
- QuantoOption on a foreign asset paid in the investor’s currency at a fixed exchange rate: no currency risk, but the price depends on the asset/FX…
- Variance swapForward on realized variance: pays variance notional × (σrealized² − K²).
- Vega notionalApproximate P&L of a variance swap per vol point near the strike; variance notional = this amount ÷ (2 × strike).