Forward Start Option
Contents
Exploring the Intricacies of Forward Start Options
Unraveling Forward Start Options
Forward start options, a variant of exotic options, offer traders a unique opportunity to initiate a contract now but activate it later with a strike price determined at that future time. These options provide flexibility and customization, allowing traders to hedge against future price movements while locking in certain parameters at the outset.
Understanding Forward Start Option Dynamics
Forward start options entail setting all contract parameters upfront, except for the strike price, which remains unknown until activation. Traders typically negotiate terms regarding the strike price's relation to the underlying asset's price, aiming to keep it near the money at activation. This strategy allows holders to exercise their rights based on market conditions at the time of activation.
Exploring Employee Stock Options
Employee stock options represent a common application of forward start options, where companies grant options to employees without knowing future stock prices. This illustrates how forward start options can be utilized in various contexts to manage risk and provide incentives within organizations.
Deciphering Cliquets
A series of consecutive forward start options, known as ratchet or cliquet options, present a unique strategy where each option becomes active upon the expiration of the previous one. This sequential activation allows traders to capitalize on evolving market conditions over time, offering opportunities for profit and risk management.