You hold a fixed-strike lookback put option written on a stock that was at-the-money at inception. The stock price at inception was $56, the stock price at maturity is $63, and the lowest and highest stock prices observed over the option's life are, respectively, $52 and $64. The payoff from the option at maturity is
A) Zero.
B) $4.
C) $8.
D) $11.

Question

Quizplus · Accepted Answer

A fixed-strike lookback put option gives the holder the right to sell the stock at the highest price observed during the life of the option relative to the strike price. Since the option was at-the-money at inception, the strike price is $56. The lowest observed price is irrelevant for put options. The highest observed price was $64, but since the option allows selling at the strike price ($56) rather than the highest observed price, the payoff is the difference between the strike price and the lowest observed price over the option's life, which is $56 - $52 = $4.

You Hold a Fixed-Strike Lookback Put Option Written on a Stock