Varieties To Trade Exotically
The trade that makes use of this type of option does not have an exercise price that is fixed when the trade begins. The stakeholder who makes us of look-back option for trading have an option to choose an exercise price that is ex-post facto till the time the option expires. The can choose an exercise price that will be most beneficial for them. The risks that are involved with the time at which the market enters are eliminated by this option because of which they cost more than the normal plain vanilla options. Read more about Crypto Code scam
Let us consider an example where there is a stock known as XYZ which is brought by an investor that has a look-back call option and expires in a month. He buys this when the month begins. By looking at the lowest price that this stock has got during its lifetime, the exercise price is decided by the investor. The investor decides this price during the time of maturity. When the underlying asset during expiration is $107 and then it has had the lowest price achieved at $72 the payoff that the investor will be getting will be $107-$72= $35
The underlying asset that is present in this type of option is another option. We can explain with an example; that is, a compound call option has been brought by an investor that has a 1-month expiration date and its underlying asset that will be brought on an XYZ stock will be another option that will be a 4-month call option. ‘The Black-Scholes’ option pricing model is applied twice to get the price for the compound option.
The payoffs got by making use of this type of option is got by calculating the average price of the underlying asset has been for a couple of specific dates.
Basically, the options that allow the stakeholder to make a decision on whether the option should have called or put upon reaching of a predetermined date is known as compound options. In this, the call that is done on call or put is a type of chooser option. The stakeholder who makes use of this type of option has the right of buying a call or put option on the stock that is underlying but it depends on what they prefer when the option is being exercised.