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Payoff Logic and Exercise Styles for Floating-Strike Lookback Calls

Article Quant Q&A · Author: palliativo
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Summary

The document asks how to interpret the payoff of a European floating-strike lookback call. It describes the strike as the maximum stock price reached over the option’s life and questions whether the payoff must therefore be zero or negative at maturity. This raises a conceptual issue about which path-dependent price belongs in the payoff formula and how the option’s payoff should be specified.

The author also asks which lookback structures are commonly traded over the counter, and whether American-style contracts are more common than European-style ones. No answer, valuation method, market evidence, or contract details are included. The note is therefore a set of questions rather than a resolved explanation; it points readers toward distinguishing floating-strike lookbacks from other lookback payoff conventions and checking actual market practice before drawing conclusions about exercise styles.

Key ideas

  • A floating-strike lookback call uses a path-dependent reference price drawn from the option’s life.
  • The author questions whether the stated payoff can ever be positive at maturity.
  • The document asks about the prevalence of European and American exercise styles in over-the-counter trading.
  • No payoff clarification, valuation approach, or market evidence is provided.

Tags

OptionsDerivatives pricing
Full text
# Lookback options - Floating strike


# Lookback options - Floating strike












Let's take the case of a Lookback Floating Strike Call, European style, where the payoff is determined by max(0, S-M), where is M is the max value of the stock over the life of the option. Am I right in assuming that this option value is always zero? As the strike will take the max value of the option and the only payoff possible at maturity are either zero or negative?

What are the most common Lookback traded OTC? Maybe more American rather European? Thanks!

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.