What is a Cliquet?
A cliquet, likewise called a "ratchet option," is a series of at-the-money (ATM) options, either puts or calls, where each successive option becomes active when the previous one lapses.
Figuring out a Cliquet
A cliquet is cash-settled, exotic option type that settles at foreordained dates and afterward resets its strike price in light of the price of the underlying security at the hour of settlement. Each new option inside the cliquet goes into force when the previous option terminates. The total premium and the exact reset dates are known at the hour of transacting a cliquet. Investors can opt to receive their payout when every option lapses or hold on until the whole series works out.
A cliquet is a series of forward start options, all connected with one another. Each forward start option addresses the advance purchase of a put, or call, option with an at-the-cash (ATM) strike price not entirely set in stone sometime in the not too distant future, typically when the option becomes active. A forward start option becomes active at a predetermined date from here on out. The premium is paid in advance, while the chance to expiration and the underlying security are laid out at the time the forward start option is purchased.
If at the main settlement date the underlying security trades below the strike price of the option (for a call), then, at that point, it lapses worthless and resets to the price of the underlying security at the hour of settlement. On the off chance that toward the finish of the next settlement the underlying security trades over the new strike, the holder might choose to receive the difference between the market price of the underlying security and the strike price. On the other hand, the holder can let it ride to receive the sum of all payouts at maturity.
The principal advantage of starting a cliquet is, on the off chance that an investor anticipates that volatility should rise, they can lock in their profits at foreordained levels and hence boost their overall portfolio return.
For instance, a three-year cliquet option with a strike of $1,000 would lapse worthless on the principal year if the underlying closes at $900. This value ($900) would then be the new strike price for the next year and should the underlying on the settlement be $1,200, the holder would receive a payout and the strike would reset to this new level. Higher volatility gives better conditions to investors to earn profits.
Cliquet Similar to Asian Options
A Asian option is an option type where the payoff relies upon the average price of the underlying asset over a certain period of time, rather than standard options (American and European), where the payoff relies upon the price of the underlying asset at a specific point in time (maturity). These options permit the buyer to purchase (or sell) the underlying asset at the average price, rather than the spot price.
Cliquets decide payouts periodically over the life of the options; in this way, it might be said, they really do act as Asian options with a average price. Of course, the math isn't something similar, particularly since there can be payouts of zero en route as individual forward start options terminate worthless.
- The total premium and the exact reset dates are known at the hour of transacting a cliquet.
- Cliquet holders can opt to receive their payout when every option lapses or hold on until the whole series works out to receive the sum of all payouts at maturity.
- A cliquet, likewise called a "ratchet option," is a series of at-the-cash (ATM) options, either puts or calls, where each successive option becomes active when the previous one lapses.