Posted: 1 Jun 2001
Lookback options provide investors with perfect market timing services. However, these options are hardly ever traded because they are much more expensive than ordinary options. The problem with standard lookbacks is that they provide the investor with much more timing than typically required. In other words, the lookback feature can remain limited to only the first (for entry timing) or the last (for exit timing) part of the options' life. In this article we provide closed-form pricing formulas for such options, fixed-strike as well as floating-strike. Analysis shows how the prices of such 'partial lookback options' respond to a change in the monitoring period. Options with relatively short lookback periods appear to offer a good solution to most timing problems at a reasonable price.
JEL Classification: G13
Suggested Citation: Suggested Citation