Cliquet option

What is it?

  • An exotic call or put option that periodically settles and resets its strike price at the level of the underlying. Also known as a ratchet option.
  • At reset dates, the option locks in the difference between the old and the new strike and pays that out as a profit.
  • If the stock has moved the wrong way during the preceding time period there will be no profit, and the investor will lose the premium corresponding to that period.

How is it constructed?

  • Essentially cliquet options are constructed from a series of forward start options.
  • The aggregate premium and the number of reset dates are determined in advance.
  • Payoff at maturity can be based on either a relative or an absolute performance.
  • The profit can be accumulated until final maturity or be paid out at each reset date.

When is it used?

  • Used where volatility is expected to rise, as investors can lock in returns periodically rather than risk losing gains that have accumulated.
  • Suitable for clients who see up/downside for a stock but are unsure as to the exact timings/sustainability of share price moves (and want to have a better chance of locking in profits once this occurs).
  • Can be implemented into a structured product for retail clients.
  • Traditionally buyers were retail and private investors when embedded in deposits and bonds as they provide a low risk exposure to quity and debt markets.
  • Now, also sophisticated investors use cliquets in order to take advantage of future assumptions about voltility.

What are the benefits?

  • Less risky than traditional options as profits are locked in as the underlying asset performs.
  • Entire cost of a cliquet is known on the day of trading – if an investor were to buy two one year vanilla calls, the price of the second call will not be known for a year.
  • Intermediate management is not required.
Advertisements

7 comments

  1. Hello there, I think your blog could possibly be having web browser compatibility issues.
    When I look at your web site in Safari, it looks fine however, if
    opening in I.E., it’s got some overlapping issues. I merely wanted to give you a quick heads up!

    Besides that, fantastic site!

  2. Hi would you mind letting me know which webhost you’re using?

    I’ve loaded your blog in 3 completely different web browsers and I must
    say this blog loads a lot faster then most. Can you
    recommend a good web hosting provider at a fair price?
    Many thanks, I appreciate it!

  3. I do not even know how I ended up here, but I thought this post was good.

    I don’t know who you are but definitely you’re going to a famous blogger if you are not already ;
    ) Cheers!

  4. This post gives clear idea in support of the new viewers
    of blogging, that actually how to do blogging and site-building.

  5. […] exotic call put option periodically settles resets strike price level underlying. ratchet option.. Click here European option greeks – wolfram demonstrations project, Explore thousands free applications […]

  6. Today, while I was at work, my sister stole my apple ipad and
    tested to see if it can survive a 25 foot drop, just so she
    can be a youtube sensation. My iPad is now destroyed and she has 83 views.
    I know this is entirely off topic but I had to share it with someone!

  7. Thanks on your marvelous posting! I certainly enjoyed reading
    it, you’re a great author. I will make sure to bookmark
    your blog and definitely will come back
    at some point. I want to encourage that you continue your great writing, have
    a nice afternoon!

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: