The Analytics of Reset Options

Abstract

Optionholders like them to be in the money at expiration. One way to make that more likely is to reset the strike price periodically over the option's lifetime, to bring out-of-the-money options back to being at the money. This is often done with executive stock options, for example, and there are also traded securities with this feature. This article derives valuation relationships and hedging parameters for such reset options and compares them with closely related instruments, such as discretely monitored lookback options.