Structured Options

Customized Payoff Profiles

These exotic options are often built from combinations of standard options to create specific, pre-defined payoff patterns tailored to particular investment objectives or market views.

1. Forward Start Options:

   • What it is: A forward start option is an option that is granted today but starts at a future date. The strike price is often set at the money (or at a specified percentage of the asset price) at the future start date.

   • Key Features:

     • Delayed Start: The option's life begins in the future.
     • Strike Price Reset: The strike price is typically reset at the start date, often to be at-the-money.

   • Purpose:

     • Employee Stock Options (ESOs): Commonly used as employee compensation, where the option starts after a vesting period.
     • Guaranteeing Future Investment Opportunities: Allows investors to lock in the right to purchase an option at a future date at a known price.

   • Example:

     • An employee is granted a forward start call option today that will start in two years. The strike price will be set equal to the stock price at that time.

   • Valuation:

     • The valuation involves discounting the expected value of the option at its future start date back to the present. This requires making assumptions about the future volatility and drift of the underlying asset.

2. Cliquet Options (Ratchet Options or Rolling Options):

   • What it is: A cliquet option is a series of options that reset periodically, locking in gains or limiting losses over successive periods.

   • Key Features:

     • Series of Options: Consists of a chain of options with sequential start dates and reset mechanisms.
     • Periodic Reset: The strike price and/or the notional principal are reset at the beginning of each period, based on the performance of the underlying asset in the previous period.
     • Global Cap/Floor: Often includes an overall cap or floor on the total return.

   • Types:

     • Annual Resetting Call Option: Each year, a new at-the-money call option is created, based on the asset's price at the beginning of the year. The investor benefits from the gains in each year, subject to a maximum overall return.
     • Lock-in Option: Guarantees a minimum return equal to the sum of the locked-in gains over each period, subject to an overall cap.

   • Purpose:

     • Guaranteeing Minimum Returns: Provides a way to participate in market upside while limiting downside risk and guaranteeing a minimum return.
     • Structured Products: Commonly embedded in structured products sold to retail investors.

   • Example:

     • A cliquet option with annual resets and a 5% cap per year. At the beginning of each year, a new at-the-money call option is created. If the stock price increases by 8% during the year, the investor only receives 5%. If the stock price decreases, there is no loss (but also no gain).

   • Valuation:

     • Cliquet options are complex to value due to their path-dependent nature and the series of embedded options. Numerical methods (e.g., Monte Carlo simulation) are often required.

Comparison Table: