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What is a Cliquet Option?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 04 November 2016
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    2003-2016
    Conjecture Corporation
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Cliquet options are a form of option that involves a strike price that will reset from time to time prior to reaching the final expiration date. One of the defining characteristics of a cliquet option is the value of the option at the time of the resetting. Depending on the current performance of the option, an investor can stand to realize a significant return based on the reset strike price, or lose a considerable sum.

The configuration of the cliquet stock option provides investors who are willing to assume the risk with the opportunity to make a great deal of money. When one of the periodic resetting dates is reached and the option is found to be trading higher than the current strike price, the investor is credited with the difference. Once the credit is completed, the strike price is reset to more accurately reflect the current trading or market price.

At the same time, it is possible to lose money with a cliquet option. When the reset date arrives and the option is found to be trading lower than the current strike price, the option will expire. At the same time, the option is rendered worthless. This set of circumstances essentially leaves the investor with nothing to show for the resources invested in the option.

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Sometimes referred to as a ratchet option, the idea behind the cliquet option is to seek out investment opportunities where the option is anticipated to trade upward over time. In an ideal situation, the option will involve several reset dates and the current trading price is consistently higher than the current strike price. This allows the investor to receive payouts on a more or less steady basis from the investment.

As with any investment opportunity, an investor should investigate the historical performance of the option before entering into this type of investment strategy. If past performance and the projections for future performance indicate the option will increase in value over time, then the cliquet option can be very profitable. However, the cliquet option should be monitored and reviewed before each reset date to determine if the option should be maintained or sold short in order to minimize a loss.

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