what is a lookback option 
a lookback option allows the holder to exercise an option at the most beneficial price of the underlying asset over the life of the option understanding lookback optionsalso known as a hindsight option a lookback option allows the holder the advantage of knowing history when determining when to exercise their option this type of option reduces uncertainties associated with the timing of market entry and reduces the chances the option will expire worthless lookback options are expensive to execute so these advantages come at a cost as a type of exotic option the lookback allows the user to look back or review the prices of an underlying asset over the lifespan of the option after it has been purchased the holder may then exercise the option based on the most beneficial price of the underlying asset the holder can take advantage of the widest differential between the strike price and the price of the underlying asset lookback options do not trade on major exchanges instead they are unlisted and trade over the counter otc lookback options are cash settled options which means the holder receives a cash settlement at execution based on the most advantageous differential between high and low prices during the purchase period sellers of lookback options would price the option at or near the widest expected distance of price differential based on past volatility and demand for the options the cost to purchase this option would be taken up front the settlement will equate to the profits they could have made from buying or selling the underlying asset if the settlement was greater than the initial cost of the option then the option buyer would have a profit at settlement otherwise a loss fixed vs floating lookback options